Pound Sterling Boosted After Rebound in UK Services Activity

December 17, 2023 - Written by Frank Davies

STORY LINK Pound Sterling Boosted After Rebound in UK Services Activity

GBP/EUR Exchange Rate Strengthens as Rebound in UK Services Activity Boosts the Pound

UK services-sector activity strengthened to a 6-month high for December while the Euro-Zone economy remained in contraction territory.

The UK data gave some credibility to Bank of England hawkish rhetoric while doubts that the ECB stance is realistic will tend to increase.

In response, the Pound to Euro (GBP/EUR) exchange rate rebounded to just above 1.1650 from 1.1610 ahead of the data.

According to flash data for December, the German manufacturing PMI index edged higher to 43.1 from 42.6 previously, but slightly below consensus forecasts while the services-sector index retreated to 48.4 from 49.6 previously.

Both French readings deteriorated on the month and below market expectations.

The Euro-Zone PMI manufacturing index was unchanged at 44.2 for December and slightly below consensus forecasts of 44.5.

The services-sector index retreated to a 2-month low of 48.1 from 48.7 and below expectations of 49.0.

According to the survey, average selling prices rose at an increased rate, posting the largest monthly increase since May to remain high by the historical standards of the survey.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said: “Once again, the figures paint a disheartening picture as the Eurozone economy fails to display any distinct signs of recovery. On the contrary, it has contracted for six straight months. The likelihood of the Eurozone being in a recession since the third quarter remains notably high.

There was a tentative positive element as factory managers were more optimistic about the year ahead with the future output index strengthening to 55.6 from 53.3, the highest figure since May.

As far as prices are concerned, he added; Companies were able to raise output prices even more than in previous months. This suggests that businesses were successful in transferring a portion of the cost increases to customers. The European Central Bank acknowledges this dynamic in its latest statement, noting that "domestic price pressures remain elevated."

ING commented; “Soft releases here hit the euro through the autumn.”

MUFG noted that the ECB core inflation figures were slightly higher. According to the bank; “This makes little sense to us and is a pretty incredible forecast when you consider how wrong the ECB has been over just the last three months. In essence these forecasts provided the justification for Lagarde to communicate a much more cautious message over the outlook for monetary policy.

It added; “That suggests to us the scope for a shift in the new year if there was further evidence by then of a continued slowdown in inflation.”

According to Nordea; “The growth risks are seen to be tilted towards the downside which is of course natural given the strong baseline while inflationary pressures are more balanced. However, given the high baseline profile, we do think that also in the inflation forecast the risks are biased to the downside.

It added; “Risks are clearly tilted towards an earlier start to the cuts, though, and further weaker data releases could yet persuade the ECB to start cutting earlier.”

The UK PMI manufacturing index retreated to 46.4 for December from 47.2 and below consensus forecasts of 47.2.

The services-sector index, however, strengthened to 52.7 from 50.9 previously which was above market expectations of 51.0 and the highest reading for six months.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “The UK economy continues to dodge recession, with growth picking up some momentum at the end of the year.

He added; “The service sector’s resilience and sticky inflation picture will add to speculation that it’s too early for the Bank of England to be talking about cutting interest rates, and will add fuel to some policymakers’ calls for further rate hikes.

He did, however, add that fears of further policy tightening could tip the economy back into decline.

According to ING; “Of the recent central bank meetings, the Bank of England (BoE) probably offered the most pushback against dovish expectations.”

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TAGS: Pound Euro Forecasts