UK services PMI on the agenda, ahead of May’s speech – Forex News Preview

Marios Hadjikyriacos, XM Investment Research Desk

As the UK’s ruling Conservative Party wraps up its annual conference on Wednesday, the nation will also see the release of its services PMI at 0830 GMT. Forecasts suggest the UK’s largest sector cooled a little in September, which may prove somewhat negative for the pound. That said, the currency’s overarching driver will be any Brexit updates, with some remarks by PM May half an hour later at 0900 GMT likely to be squarely in focus.

The seemingly ceaseless barrage of Brexit headlines that has dominated price action in sterling recently is unlikely to abate anytime soon, as the negotiations now enter their final stretch and both sides look ready to make some long-awaited compromises. Recent media reports suggest the UK is prepared to concede having checks on goods between mainland Britain and Ireland, but in exchange wants the EU to temporarily keep the entire UK within the bloc’s customs union.

Hence, all eyes will be on Prime Minister May when she steps up to the podium on Wednesday to address her own party. Investors will look to decipher whether meaningful progress on the Irish border question is indeed on the plate over the coming weeks. Remarks that point towards that direction would likely spell good news for sterling, whereas the absence of such hints may weigh on the currency.

Half an hour before May speaks, markets will turn their attention to the UK services PMI for September. As services account for nearly 80% of UK GDP, this print is seen as a forward-looking gauge of the broader economy’s performance. Forecasts point to a modest decline in the index to 54.0, from 54.3 in August. While it would still remain safely above the 50 threshold that separates expansion from contraction, such a dip would hint at a modest slowdown in the sector, and may thus prove slightly negative for sterling.

To be fair though, barring a notable deviation from forecasts, Brexit developments will most probably prove to be a far larger driver for the pound. Particularly so because markets do not anticipate the Bank of England to hike rates again until August 2019 amid Brexit uncertainties, which suggests economic data alone may have less of an impact than usual on policymakers’ decisions, until the political fog lifts.

Technically, further declines in sterling/dollar could encounter a first line of support near 1.2895, a zone defined by the September 10 lows. A downside break would open the way for a test of the September 5 trough of 1.2785, with even steeper declines bringing into view the 15-month low of 1.2660.

On the flipside, advances in the pair may stall initially near the psychological handle of 1.3000. If the bulls pierce above it, the next line to watch would be around 1.3100, where the 100-period moving average is located on the 4-hour chart. Higher still, the September 26 high of 1.3215 would increasingly attract attention, ahead of the 1.3300 area – this being the peak of September 20.