UK PMI unexpectedly moves higher supporting GBP

Summary:

• UK services PMI easily beats expectations reaching its highest point in eight months
• Cost inflation intensifies, August rate hike odds move higher in the aftermath
• Pound continues bouncing off the support, a possible inverse SHS pattern at the daily time frame

The UK services sectors expanded in June at the fastest pace in eight months according to the Markit survey. It boosts odds for a rate hike in August and enhances a view that the second quarter growth will exceed the pace seen in the first three months (based on PMIs for the second quarter one may estimate we will be offered the quicker pace than 0.2% QoQ seen in the first quarter). As a result of the release the pound is trading slightly higher against the dollar, and the technical backdrop seems to bode well.

Higher levels of services PMI coincide with the most recent bounce in retail sales. Source: Macrobond, XTB Research

In June services PMI climbed 55.1 from 54 seen previously (the median estimate had looked for 54 as well), and the details look even more promisingly. First and foremost, June saw another intensification of input cost inflation as service providers cited greater fuel bills and staff salaries. Moreover, higher operating expenses resulted in the fastest rate of prices charged inflation since March, according the Markit. On top of that, one needs to pay attention to the high levels of capacity utilisation as they encouraged service managers to pass larger costs on new clients (this is the point we have been writing about for some time not only with regard to the UK economy). As a result of these figures the OIS-implied likelihood for a rate increase in the following month increased from 65% to roughly 70% suggesting that a move in August is slowly becoming a done deal.

Other details disclose the fastest expansion of business activity during the past eight months continuing a recovery begun in the aftermath of stern winter. New work saw also the strongest increase since May 2017, albeit at the same time the rate of job creation stayed just modestly changed mirroring simmering difficulties which employers face while hiring additional staff. Furthermore, the survey showed an overall improvement in demand which is another signal that service providers might continue trying to pass rising operating costs on their customers. Notice that employers are also facing high capacity utilisation hence they have to either boost investment spending so as to heighten constrained capacity or lift prices - both conducts should be GBP supportive.

Having a closer look at the GBPUSD one may arrive at a conclusion that a turning point could be just observed. The pair managed to stay above its critical support nearby 1.3050, and bounced off it afterwards. Assuming that we are currently having a brush with the inverse head and shoulders one may suspect that pair could see a bounce at least toward 1.3450 followed by 1.3610. Source: xStation5