GBP/USD: UK Service Sector Activity In Focus

The pound gave back early gains on Monday. The pound started the week moving convincingly higher versus the dollar. The pound US dollar exchange rate rallied to a high of US$1.3255. However, a strengthening dollar and soft UK data sent the pair southwards to US$1.3150 overnight.

What do these figures mean?
When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.For example, it could be written:1 GBP = 1.28934 USDHere, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound. Or, if you were looking at it the other way around:1 USD = 0.77786 GBPIn this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.

Brexit optimism initially boosted the pound. Investors are becoming more hopeful that UK Prime Minister Theresa May will be able to push her Brexit deal through Parliament. There have been increasing signs that the Eurosceptic conservatives in government are willing to adopt a softer approach to Theresa May’s Brexit deal in order to ensure that Brexit actually happens.

Why is a “soft” Brexit better for sterling than a “hard” Brexit?
A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.

The pound turned southwards following weak construction sector data. The UK construction sector PMI dropped to 49.5 in February, down from 50.5 in January. 50 separates expansion from contraction. This is the weakest reading for the construction industry since March last year. Brexit uncertainty combined with builders not being able to get hold of materials amid an increasing in stockpiling has hit the sector. The pound fell on the weak data.

Today investors will be looking to assess the impact of Brexit uncertainty on the UK service sector. In January, the UK service sector just managed to remain in expansion territory at 50.1. Investors will be watching closely to see if that remains the case in February. Further weakness could increase fears that the UK economy slipped into contraction in the first quarter of this year.

US Data In Focus Ahead Of US Jobs Report

The dollar had a slow start on Monday but then gained ground quickly. Dollar traders shrugged off comments by President Trump over the weekend as he aimed criticism at Fed Chair Jerome Powell.

The dollar was well supported overnight as China lowered its growth forecast. China’s economy is expected to grow 6%—6.5%, down from 6.5% as high debt and the US—Sino trade was hit the economy. Lingering concerns over the health of the Chinese and global economy have meant investors are adopting a more cautious approach. Under these circumstances the dollar does well because of its reserve currency and “safer” status.

Today investors will look to US ISM non-manufacturing data for clues as to the health of the US economy ahead of the US jobs report on Friday.

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