Eyes on the PMI as services and sterling in the spotlight

Jake Cordell
Follow Jake
The purchasing mangers' index (PMI) is being scrutinised like never before in the wake of the EU referendum result
The purchasing mangers' index (PMI) is being scrutinised like never before in the wake of the EU referendum result (Source: Getty)

Sterling could be set for a bumpy day of trading tomorrow as the closely-watched services purchasing managers’ index (PMI) is set to provide another clue to the health of the post-referendum economy.

Analysts expect the industry, which accounts for the vast majority of the UK economy, to bounce back above the crucial no-change 50-mark on the PMI. The index tumbled at its fastest pace since the financial crisis in July and raised fears the UK was on the brink of a recession.

July’s reading came in at 47.4, only the second time it had fallen below 50 in five years, but economists are forecasting the score for August to come in somewhere between 50 and 51. Expectations have been pushed up after a surprisingly strong manufacturing PMI last week. The jump from 48.3 in July to 53.4 in August sent the pound surging higher, gaining almost one per cent on the news.

The pound is now trading at its strongest level against both the dollar ($1.33) and the euro (€1.19) since the Bank of England unveiled its post-referendum rescue package with a cut to interest rates and a £70bn extension of quantitative easing.

Traders said there could be another day of big movements on the currency markets if tomorrow’s reading comes in markedly above or below expectations.

“Typically, we see an amplified market response to the services figure compared with the other sectors, given the greater influence the sector has upon UK GDP and jobs,” said Joshua Mahony of IG.

Read more: Japan's 18 Brexit demands

“If the number is strong, it will confirm the improvement in economic activity we have seen of late and should therefore underpin sterling,” added Fawad Razaqzada of Forex.com

However, some analysts, including IG's Mahony, believe a good score has probably already been priced in off the back of last week’s figures. Moreover, the service sector’s recovery is unlikely to be as dramatic as manufacturing, Capital Economics pointed out, “because it doesn't benefit as much from the falling pound.”

Despite the mini rally, sterling has still lost 10 per cent of its value since the referendum, with a number of surveys showing manufacturing exporters have been given a big boost as their goods have become more competitive.