Sterling shrugged off this morning’s strong retail sales data, suggesting there is a high bar for UK economic data to clear before it adds any further upside to the pound.
Much of the initial rebound due to lockdown measures easing has been priced into UK financial assets over the course of the last month, meaning a more definitive trend is needed to highlight the strength of the economic recovery in the eyes of markets. This will take time. This view was again confirmed with this morning’s preliminary PMI data, which saw the services sector underperform expectations by 0.4 points with a reading of 61.8. Sterling didn’t get jolted by the underperformance, and rightly so, given that the survey was conducted between May 12-19th meaning only 3 days of the latest reopening was captured in the data.
The details of the release are a bit more constructive than the headline readings suggest.
Private sector employment rose at the quickest pace since June 2014, largely due to the reopening on May 17th, while cost pressures were the strongest for nearly 19 years – a trend that has been visible across multiple developed market economies as the rebound in demand outpaces that of supply. Within the services sector specifically, new business volumes and backlogs of work increased at the sharpest rate in about seven-and-a-half years, while new work orders and supply chain delays resulted in the highest manufacturing reading since the survey began in January 1992.
The level of optimism visible in the underlying indices supports the narrative of momentum in the near-term economic recovery. This bodes well for a constructive GBP outlook should a robust trend appear in multiple data points.
Output in manufacturing and services sector rises to near-record highs as demand picks up with economy reopening
Author: Simon Harvey, Senior FX Market Analyst