Daily GDP NZD Update: Pound Ticks Up on Higher Services Score

October 4, 2017 - Written by Frank Davies

STORY LINK Daily GDP NZD Update: Pound Ticks Up on Higher Services Score

On Tuesday’s trading session, the Pound advanced slightly against the New Zealand Dollar. Opening at an exchange rate of 1.8467, the GBP/NZD pairing later closed at 1.8484.

Today’s Pound Influencers – Higher UK Services Score but ‘Disastrous’ May Speech

Today’s primary UK economic data has covered PMIs, which look at the level of economic activity. Earlier in the week, both the UK manufacturing and construction PMIs declined, followed by the overall composite PMI today.

Traders have not been too downhearted, however, as the crucial services PMI showed growth in September.

A higher services score is a significant part of UK economic growth, as it is the largest contributing sector to the economy.

One of the main responders to the news was Chris Williamson, economist at IHS Markit. Mr Williamson gave a balanced outlook on how the Bank of England (BoE) could respond, stating;

‘The services sector saw another month of modest growth, running in the middle ground between the robust expansion seen in manufacturing and the contraction recorded in construction.

The three PMI surveys [manufacturing, construction and services] put the economy on course for another subdued 0.3% expansion in the third quarter, but the fourth quarter could see even slower growth.

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Across all three sectors, inflows of new business in September were the lowest for 13 months, and business optimism about the year ahead slipped lower.

Higher costs meanwhile led to the largest monthly rise in average prices charged for goods and services since April, meaning consumer price inflation could rise above 3% in coming months.

The surveys therefore portray an economy struggling with the unwelcome combination of sluggish growth and rising prices, presenting a dilemma for policymakers.

The rise in price pressures will pour further fuel on expectations that the Bank of England will soon follow-up on its increasingly hawkish rhetoric and hike interest rates.

However, the decision is likely to be a difficult one, as the waning of the all-sector PMI in September pushes the surveys slightly further into territory that would normally be associated with the central bank loosening rather than tightening policy’.

Adding a closing note of concern, Williamson stated that these were the worst quarterly PMI readings since Q1 2013.

Duncan Brock of the Chartered Institute of Procurement and Supply has warned that the UK could be faced with stalling growth in the future. Mr Brock has said;

‘Where consumers recovered a little from their spending hesitation last month, it was the turn of businesses to be spooked into inactivity, exerting greater scrutiny over new projects and long-term spending plans.

The pressure of Brexit and resulting uncertainty were at the heart of this indecision’.

One of the somewhat positive voices after the services announcement was Chris Sood-Nicholls of Lloyds Bank Commercial Banking. Mr Nicholls estimated that;

‘This slight increase in the index is encouraging, particularly given a backdrop of mixed economic signals.

The sector still faces a period of uncertainty surrounding Brexit, a sentiment echoed in Moody’s recent decision to downgrade the UK’s credit rating to Aa2 from Aa1.

Those consumer facing parts of the sector will also be mindful of the potential for an interest rate rise in the coming months, particularly as we head into one of the busiest trading periods of the year’.

A ‘headwind factor’ on the Pound today has been Theresa May’s speech at the Conservative Party Conference, which saw a somewhat calamitous string of events play out.

As well as the PM being assailed by a joke P45 letter, she also struggled with a sore throat and was subject to a set malfunction towards the end.

On the substance of her speech, there was a lukewarm reception to the plan to build 25k homes in 5 years, given that this would only make a small dent in the housing shortage.

New Zealand Dollar Slips on Continuing Post-Election Uncertainty

With little direct data to refer to today, NZD traders have been left in a loop. This has resulted in the New Zealand Dollar dipping against the Pound, although limiting factors have prevented Sterling from making a significant rally.

In the background, coalition talks drag on, with neither Labour nor the National Party seeming any closer to forming a working coalition with New Zealand First.

GBP NZD Outlook: BoE Official's Speech Imminent

The Pound might be affected by a speech from a Bank of England (BoE) official this evening; Sam Woods is due to give remarks later on.

If Woods happens to mention higher UK interest rates or tightening monetary policy, the Pound may firm in the GBP NZD pairing.

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