Pound Boosted By Record Services PMI

Includes: FXB, FXE, GBB
by: FX Analyst


Markit Services PMI shows increasing demand for services in the UK with accelerated growth of 58.6 in November over 56.2 in October. This is the 23rd consecutive month of expansion.

Firms have to increase employment to build capacity as backlog increased for 20 consecutive months.

GBP rose against the strong USD with this report which dispelled fears of a slowdown in the UK economy.

The smart move is not to pit the strength of GBP against a strong USD. The euro would be a better target with a good entry price.

In the latest good news for the UK economy, the Markit Service Purchasing Manager Index (PMI) showed a better than expected expansion of 58.6 over market forecast of 56.6 in November and much better than the reading of 56.2 in October. The Services industry account for a significant 79% of GDP according the World Bank. The financial industry is especially dominant with London being the world's largest financial centre.

Source: Forex Factory

This report released on 03 December 2014 reported on the survey done between 11-26 November 2014. This report revealed that there is a sharp increase in demand for services such that firms have to increase employment to cope with increased business. This is the 23rd consecutive month of growth for the UK's services industry and the pressure on labor supply has led to wage increases.

This has been offset by lower energy costs and output prices remained stable as competitive pressures capped any price increments. This accelerated increase in service demand as seen in the reading of 56.6 in October to 58.6 in November came from both new and existing clients. This has also resulted in 20 consecutive months of rising backlog for firms.

This is a welcomed relief from a relatively weak UK GDP growth of 0.7% in the third quarter amidst concerns that the UK is being dragged down by Europe.

This quote is from Chris Williamson, Chief Economist at Markit:

Faster growth of services activity brings welcome news that fears of a potentially sharp slowdown in the economy look overplayed.

This has directly translated to the Great Britain pound (GBP) strength against the United States dollar (USD). This news release saw a sharp spike of 1.5617 to 1.5690 and counting at the point of writing. This 0.47% may pale in comparison to the recent sharp moves but this GBP strength is notable given the recent strength of the USD.

The USD strength can be seen on the Dow Jones FXCM USDollar index which tracks the strength of the USD against the EURUSD, GBPUSD, AUDUSD and USDJPY which covers 80% of the spot Forex market. So the obvious thing is not to pit the fledging strength in the GBP against the very strong USD. So this is a good time to close out your long GBPUSD position even if you are trying to fade the market.

The better position would be to short the EURGBP instead. Europe has cast a shadow over the UK recovery as the destination of around 47% of its export market. The euro itself is weakening against the European Central Bank's intention to purchase sovereign bonds in addition to its general weakness and existing monetary accommodation program.

As you can see in the chart above, the EURGBP has already moved and by the time you read this, the price will have moved further. The key point to remember is that the price has not been fixed. The strength of the GBP is just at the early stage and there will be uncertainty in the price. This will power several retracement moves for you to enter the short EURGBP trade at an attractive price which is not overextended. This can be achieved with a market limit order. So remember not to chase the market and let the market come to you. Lastly, you would have to accept that it is alright not to be filled, your capital remains intact and you can always find new trading ideas here on Seeking Alpha and on my new articles.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.