Pound traders are likely to be nervous ahead of the UK services PMI

5 July 2016, 09:19
Sherif Hasan

Following the collapse of the construction PMI there's going to be some nervousness around the services PMI

GBP longs beware! Yesterday's construction PMI was a very loud warning bell for Brexit related economic fallout. My first thought was that it was a big overreaction, considering that 80% of the survey was conducted before the result was known. However, if that's how firms were reacting before the vote, there's a very big chance that things won't improve now the result is known.

We've had other stories since then that have reminded traders that there's a long way to go before we know exactly how this mess will unravel. Eamonn reported business confidence dropping and a UK fund putting the block on clients liquidating holdings in its property fund. As we've explained many times, Brexit isn't a single data point that's forgotten about after 5 minutes. We face months of uncertainty that's going to play out in all corners of the country and economy. Sometimes traders can suffer from goldfish memory and think that the worst is over just because the pound bounced. The negativity is going to last and that's going to keep the heavy bias on the pound for a long time.

At 8.30 GMT we get probably the biggest indicator for the UK, the services PMI. Services makes up the biggest chunk of the economy and thus GDP. Yesterday's construction PMI is going to have traders thinking we could see the same collapse today. It's definitely a risk that can't be ignored.

Last month we saw it jump (53.5) well above expectations (52.5) and well above the month before (52.3). This month some softness is expected and a drop to 52.8. Although we can't use the construction number as a nailed on guide, we should factor in a far worse number. If we drop but hold in expansion then maybe the reaction in the pound won't be as severe. If we drop into contraction then the pound is going to get hit hard. If there's a surprise and we print a higher number that could catch the market off guard and 1.33 will come back into focus.

Keep an eye on the price action as London opens up and digests the overnight news, and then in the minutes leading up to the release. If we see some choppy moves it doesn't mean the numbers been leaked but that traders are reducing risk into the number.

UK services: A big number for the pound

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