After snapping an aggressive seven-day losing streak, any hopes for the Cable to rebound significantly ended sharply following an unexpected Services PMI miss from the UK economy. Although a Services PMI at 56.5 still represents robust expansion, the major concern with this reading is that it has been released merely a week after GDP data showed that the sector was growing at its weakest pace in two years. The services sector represents such a high proportion of the UK GDP that such PMI misses completely contrasts with expectations for UK economic growth to rebound strongly in Q2.
The Cable already suffered losses at around 80 pips following the PMI reading, but further bearish momentum is likely to follow because it is completely inevitable that the Bank of England (BoE) will leave interest rates unchanged later today. There is still some optimism that the BoE will be able to raise UK interest rates at the beginning of next year, but I personally see this as very ambitious when you take into account the BoE’s extremely strict inflation views and I think that the earliest we will encounter a UK interest rate rise is the middle of next year. Will the Cable be able to recover the sharp 500 pip losses it has witness in the past fortnight? It looks very unlikely and with sentiment towards the UK economy weakening, the pair is in an unfortunate position where substantial upside gains are seen limited to dollar weakness.
The Cable is the pair that investors and traders are most likely to be keeping an eye on, but it is beside a recently resurgent euro that the pound is really weakening against. A combination of optimism that a Greece deal will finally be reached, alongside inflation figures greatly improving has improved sentiment towards the UK economy. This has also motivated the euro to really accelerate against the pound in recent days, with the pair jumping nearly 300 pips.
Follow Jameel on Twitter @Jameel_FXTM
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