UK services PMI expected to nudge up

The Markit/CIPS services PMI for the UK will be watched on Friday at 09:30 GMT for evidence that the dominant sector of the British
economy remained in expansionary mode amid the increasing strain of the Brexit uncertainty. However, without an end to the Brexit impasse at Westminster, sterling will struggle to find much upside momentum even if the data doesn’t disappoint.

The past week has already seen the release of the manufacturing and construction PMIs for December, both of which suggested that the UK economy is not doing too badly compared to its European peers. The manufacturing PMI beat even the top estimates to surge to a 6-month high of 54.2 last month, while the construction PMI was slightly below forecasts at 52.8. However, looking at the details of the data, the jump in manufacturing activity was mainly attributed to stock piling by companies in preparation for a possible disorderly Brexit, which could create long border checks and delays.

Meanwhile, the services sector, which is seen as the engine of UK growth, is expected to underperform both the manufacturing and construction industries for the second month in-a-row in December. The services PMI is forecast to rise slightly from 50.4 for 50.7, staying just above the 50 level that separates expansion from contraction.

An unexpected drop in services activity could pull the pound below the near 21-month low of $1.2436 it touched earlier today, as it would point to stagnating growth in the world’s fifth largest economy. Sterling has already been under heavy selling pressure in recent weeks as Parliament remains split as to how to proceed with Brexit. Prime Minister Theresa May is hoping she can win further reassurances from the EU on the Irish backstop issue before her Brexit deal is put to the vote during the week commencing January 14 so that it can pass through Parliament and avert a crash exit from the EU.

In the meantime, the lack of progress on the Brexit front will limit any potential short-term gains that could come from a data beat. The $1.26 handle is the first major resistance for cable if there is a positive surprise in the services PMI as it’s close to the 61.8% Fibonacci retracement of the upleg from $1.2475 to $1.2814. A break above could see the next test come in the $1.2680-85 region where the 50-period moving average is converging with the 38.2% Fibonacci in the 4-hour chart.

However, if the services gauge adds to concerns of a major slowdown, the pound could slip below immediate support around the 78.6% Fibonacci at $1.2548 and head back towards the 21-month trough. A breach of that low would open the way for the $1.24 handle, which is just above the 123.6% Fibonacci extension.