UK Services Sector Gives Sterling a Much-needed Upside Surprise

The UK’s services sector showed some impressive growth in July, posting its highest reading in four months. Recent data has shown poor growth from the UK and this services sector result has given sterling a much-needed boost.

UK economic prospects have slightly improved, said Richard Driver, analyst for Caxton FX. “After Monday’s worrying contraction in the UK manufacturing sector, and the slowdown in the construction sector, this services growth figure is excellent. Representing 70% of the UK economy, this really is the figure that matters. While we are looking to rebalance our economy in favour of exports, in the absence of manufacturing growth, we must be very relieved with robust performance in our ‘bread and butter’ services sector.”

He added: “This certainly bodes a little better for the third quarter but it is important not to get ahead of ourselves. By the look of sterling’s short-lived rally against the euro, the market still wants further evidence that the UK economy is on a stable footing. There is plenty of forward-looking data which suggests sluggish UK growth moving forward, but fears of a double dip recession will be eased for now.

Driver believes that the data did very little to change the Bank of England’s interest rate outlook, the UK rate will remain at 0.5% for the rest of this year. “Arguments for UK quantitative easing have weakened though,” he said.

Sterling has made strong gains on the dollar as a result. “In light of the consistently poor data coming out of the US at present, sterling has been given a boost of a whole cent against the greenback. However, sterling has erased gains against the euro; eurozone services growth overshot expectations and retail sales figures were also very impressive this morning. These good news stories from the US and eurozone economies are really emphasising the poor growth figures coming out of the US, the dollar is very much out of favour at present and GBP/USD is up at $1.64,” said Driver.


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