Summary:

• UK services PMI beats the forecast in September and partially wipes off an unfavorable tone following the manufacturing and construction readings
• Input cost pressures intensify to its seven-month high in the past month
• GPBUSD may bounce on the back of better data, an extended upside could be limited though

Soft indicators from the UK economy have been hard to analyze of late. While manufacturing and construction slowed down in the past month, services activity unexpectedly improved in September. All of that makes the data blurry with no an unequivocal signal for the Bank of England.

Services activity in the UK economy registered an uptick, manufacturing and construction proved to be lackluster though. Source: Macrobond, XTB Research

Services PMI from the UK economy came in at 53.6 in September beating the consensus at 53.2 (the prior month saw the same value). It has lifted the composite PMI subtly from 54 to 54.1 (notice that we saw a slowdown in manufacturing earlier this week). On the face of it, the soft data from the UK is ambiguous even though we take into account that the services sector accounts for the largest part of the economy. Moreover, impetus regarding construction has been astounding of late which could overshadow a bit better reading from services.

Taking a closer look into today’s report one could notice that price pressures intensified further. The Markit’s communique reported that input cost inflation reached a seven-month high and remained among the strongest seen since early 2011. It stemmed chiefly from rising energy prices alongside increased prices for imported items (a downbeat effect from the outstandingly weak pound). Consequently, it resulted in another solid pick-up in average prices charged by service sector firms. By and large, inflation appears to be still the apple of the BoE’s eye, nonetheless poorer conditions for investments (sluggish PMIs in manufacturing and construction) may make the MPC confounded with regard to its next move in interest rates.

On top of that, one could not forget about an unwelcome mix of muted growth and rising prices which undercut real wage growth. This is for sure a dilemma for policymakers but traders seem to be quite certain that we’ll see a rate hike by the end of the year with an implied probability (based on OIS) of that a move hovering around 80%. To sum up, given that speculative investors have already entered a long net positioning on the pound and weighing it against the currenct economic backdrop of the UK economy one could assume that today’s upbeat data might offer just a short-lived boost for the pound.

The GBPUSD might be eager to make a move higher towards 1.33 in the wake of the upbeat data. Albeit, an extended leg higher could be contained given that sellers might get a support in form of an upper boundary of a descending channel. If so, there will be a chance for them to take the price down again even towards 1.3160. Source: xStation5