Data released this morning showed that the UK services industry continued to expand in May, measured by the Purchasing Managers’ Index (PMI).
Although the figure, of 55.4, was below market forecasts, it still underlines solid growth within the service sector. Service providers maintain high expectations of future growth but there are concerns building about the potential adverse effects of the government’s policies to cut the budget deficit. On the surface, recovery in the sector is encouraging but weak trends and fiscal tightening could see strains in the coming months.
Duncan Higgins, senior analyst at Caxton FX says, “It is certainly encouraging that the services sector is continuing to expand, but the upcoming budget cuts do cloud prospects for the industry. For the past year the sector has consistently been in positive territory. The risk is that this trend could be severed, with the proposed cuts expected to weigh heavily for some time.”
Unsurprisingly given the current macro trends, the data has had little direct impact on the currency markets with the pound continuing to trade around the mid €1.19s.
Higgins comments, “Economic fundamentals are continuing to be sidelined, with the eurozone debt debacle holding focus. The level of risk in the market is likely to continue determining currency movements, with the UK upcoming Budget also providing impetus for the pound,” continues Higgins.
“Whilst the underlying economic recovery in the UK remains buoyant and confidence towards the eurozone remains heavily subdued, we expect sterling to maintain its upward trend. Over the medium term, we expect that sterling could drift steadily toward €1.25, though the Budget will remain a key obstacle, “continues Higgins.
Currently sterling is trading just below 1.20 against the euro, unchanged on the day, and at 1.4650 against the US dollar.
