3rd February 2016
Sterling jumped on reassuring news for UK growth prospects this morning as purchasing managers reported solid expansion in services during January.
The services sector was entirely responsible for UK GDP growth of 0.5% quarter-on-quarter in the last three months of 2015 so the solid performance in January reported by the purchasing managers is reassuring for growth prospects in the first quarter of 2016, explains Howard Archer, chief UK and European economist at IHS Economics.
He says: “The purchasing managers’ survey thankfully showed ongoing solid expansion in the services sector in January. Specifically, the business activity index was essentially stable at 55.6 in January after edging back to 55.5 in December from a four-month high of 55.9 in November.”
Andy Scott, economist at HiFX, the currency specialist, says: “Sterling rose against both the Dollar and the Euro following the release of the services PMI for January which showed activity growth picked up.
“Sterling reached a three-week high against the Dollar of 1.4460, up around 0.5% as it continues a gradual recovery from last month’s 7-year low below 1.41. It gained by a similar amount against the Euro which has benefited from the volatility in financial markets this year as investors have become more risk averse.
“January was a volatile month for Sterling, with the average daily range for GBP/EUR rising nearly 50% from 0.9%, to 1.3%. Against the Dollar, the average daily range rose by nearly 40% from 0.75%, to 1%.
“Fears over ‘Brexit’ were exacerbated by global growth concerns as oil prices tumbled alongside stocks, causing large swings in Sterling and making it one of the worst performing G10 currencies so far this year.
“When you look at the fundamental picture though, the weakness of Sterling looks a little overdone. The figures this morning show the economy remains in a moderate growth mode and consumer confidence is towards its highest for several years as unemployment continues to fall.
“We expect Sterling to push higher against the Dollar in the months ahead with the Fed less likely to hike rates with U.S growth slowing. Against the Euro though, we expect Sterling to head towards a more neutral level, between 1.25-1.27.”