British Pound Rebounds on Three Month High Services PMI Data

While investors assess whether the Bank of England will raise interest rates when it meets on Thursday, the British pound fell below $1.37 at the start of November. At the same time, the Federal Reserve is widely expected to announce a reduction in the amount of money it is purchasing through asset purchases.

Since rising inflationary pressure has prompted several policymakers in the United Kingdom, including Governor Andrew Bailey, to advocate for higher borrowing costs, whereas three officials are considered to be strongly dovish, leaving the balance of power in a tight grip on Ben Broadbent and Jon Cunliffe, who have not spoken publicly about interest rates in recent months.

Rishi Sunak, the Finance Minister of the United Kingdom, told Parliament this week that the economy was on track to expand more swiftly than predicted in 2021, while predictions for the unemployment rate and the budget deficit were both reduced.

According to the IHS Markit/CIPS UK Composite PMI, the final reading for October 2021 was raised up to 578.8 from a preliminary estimate of 56.8. This is a significant increase over the previous month’s final reading of 54.9.

This month’s reading indicated a robust and accelerated increase in private sector business activity in the United Kingdom, with service sector activity outpacing manufacturing activity for the fifth consecutive month and by the widest margin since February 2009, as the latter was hampered by a lack of available supplies.

Overall, new business volumes expanded at a rapid pace, and the rate of job creation remained close to a recent record high, despite the fact that backlogs of work climbed for the eighth consecutive month. On the cost front, both input and output expenses increased at historically high rates.

Compared to a preliminary estimate of 58.0 in October 2021, the IHS Markit/CIPS UK Services PMI was revised higher to 59.1 in October 2021, a significant increase from September’s 55.4.
It was the fastest rate of recovery since July, though it was still slower than the peak seen in May. The reopening of the economy and relaxation of international travel restrictions helped to boost demand, with new export sales increasing at the fastest rate in more than three years, according to the latest reading.

The rate of new job growth was the fastest it had been since June 2018, while the rate of job creation was the highest it had been since June 2014. Aside from that, backlogs of work continued to grow for the ninth consecutive month, while inflationary pressure increased, with both input prices and output charges growing at historically high rates.

Finally, company confidence declined for the second month in a row, reaching its lowest level since January. Despite a minor slowdown to 9.9 percent annual growth in October 2021 from 10 percent the previous month, annual home price rise in the United Kingdom was still higher than the market’s estimates of 9.3 percent.

After accounting for seasonal influences, house prices increased by 0.7 percent on a monthly basis, above the market projection of 0.4 percent. The average price of a property in the United Kingdom has already surpassed £250,000, representing a gain of £30,728 since the epidemic began in March 2020.

“The picture for the time being remains quite unclear. Providing the labour market continues to be robust, conditions are likely to remain rather strong in the coming months, particularly given the market’s current momentum and the potential for further alterations in home preferences as a consequence of the pandemic to bolster activity.

Although a lot of reasons imply that the pace of activity may reduce, this is not the case. In the meanwhile, it is still uncertain how the broader economy will react to the government’s decision to end its support measures,” said Robert Gardner, Nationwide’s Chief Economist.

Due to the positive services PMI data, the pound has reversed course after posting a double bottom at 1.3606. While writing this report, the GBP/USD pair was trading at 1.3650. An hourly close above 1.3660 will take the GBP/USD pair to 1.3850 in the next few days.