UK PMIs support BoE economic assessment – GBPUSD falls in response
The UK's flash services PMI missed the forecast, coming in at 51.8 vs the expected 56.9. That's a surprisingly big miss to the downside and well-off last month's print of 58.9. This number is much closer to 50 than is comfortable - anything under 50 implies contraction. The manufacturing PMI is also down, albeit only marginally so, printing at 54.6 against the forecast of 54.9, lower than the 55.8 from last month.
Regarding service providers, the IHS Markit press release writes that "survey respondents often noting that economic and geopolitical uncertainty had contributed to a slowdown in client demand." Moreover, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, maintained that " the survey data...point to the economy almost grinding to a halt as inflationary pressure rises to unprecedented levels."
This bearishness is concerning given the BoE's previous policy summary, which suggested that inflation will reach slightly over 10% in Q4. The BoE also wrote that "UK GDP growth is expected to slow sharply."
The BoE's summary suggests stagflation, and the weak PMIs support this. In our view, the BoE dissenters were looking to front-load the rate hikes, knowing that future hikes would be difficult to implement given the slowdown in economic activity. Notwithstanding, the PMIs suggest that the slowdown is now underway.
In response, GBPUSD has dropped sharply:
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The EMAs have crossed negatively, and the stochastic is also looking to cross down (black ellipses). If it moves below 20 and holds there (blue arrow), momentum will have picked up to the downside, applying bearish pressure to the cable pairing.
Russell Shor
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.
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