GBP/USD shivers as UK recession risks rise following historic April PMI data

The GBP/USD pair declinedslightly as the market reacted to the record low manufacturing and services PMI data from Markit.

GBP/USD falls as PMI drops again

The manufacturing sector has been significantly affected by the ongoing shutdowns in the UK. Many businesses have closed shop as they comply to the government social-distancing policies. As a result, the GBP/USD pair has dropped by almost 7% this year.

A report by Markit showed that manufacturing sector dropped significantly in April. The manufacturing PMI dropped to a record low of 32.9 from the previous 47.8. The decline was mostly because of a severe decline in production, new orders and employment. These were offset by a modest reduction in stocks of purchases and longer delivery times. The textile industry was the worst-performer in the manufacturing sector.

Meanwhile, activity in the services sector also declined. The services PMI dropped to a record low of 12.3from the previous 34.5. This number is more sensitive to the UK economy since services account for more than 80% of the country’s GDP.  According to Markit, most declines were from the hotels, restaurants, and other consumer-facing industries.

As a result, the composite PMI dropped to a record low of 12.9 from the previous 36.0. In a statement, Markit said that 81% of UK service businesses and 75% of manufacturers recorded low business activities.

It is easy to see why. Activity at Heathrow Airport have declined significantly since many airlines are not flying. Similarly, many restaurants, cafes, bookshops, and malls have also closed. In a statement, Chris Williamson of Markit said:

“The UK economy has been hit by the COVID-19 outbreak in April to a degree far surpassing anything seen in the PMI survey’s 22-year history. Business closures and social distancing measures have caused business activity to collapse at a rate vastly exceeding that seen even during the global financial crisis, confirming fears that GDP will slump to a degree previously thought unimaginable in the second quarter due to measures taken to contain the spread of the virus.”

These numbers came shortly after Markit released worrisome manufacturing and services PMI data for the Eurozone.

Brexit talks in focus

The GBP/USD pair has been affected by Brexit. This week talks between the UK and the European Union are ongoing. The challenge for the negotiators is that time for a deal is running out. The two sides have until June 30^th to seek an extension.

According to a recent report, the UK team doing the negotiations is divided about whether to seek the extension. Experienced civil servants in the group are advocating for a longer period to hammer a deal with the EU. On the other hand, politicians in the team have rejected any plans to extend the transition period.

UK in a recession

These numbers provide solid proof that the UK economy is currently in a recession. This is mostly because other numbers and news have been disappointing. For example, a number of retailers like Debenhams and BrightHouse have gone bankrupt. Additionally, the government halted the housing market to prevent more damage. All these have led to a significant weakening of the British pound.

The labour market too is not doing well. Data from the government released early this month showed that more than 950k people have filed for unemployment benefits. There are chances that the number has risen since then. In another worrying sign, a report by the Office of National Statistics (ONS) showed that more than a quarter of businesses surveyed planned to cut jobs.

In a report last month, CEBR said that the country’s economy would slide by 15% in the second quarter. They estimated that the economy would slide by more than 0.5% this year and bounce back in the coming year. Another report by Niesr said that the economy would contract by 25% in the second quarter while another paper by OBR said the economy would shrink by 35%.

GBP/USD technical outlook

The daily chart shows that the GBP/USD pair found some significant support during its recent upward trend. This resistance happened at the 100-day exponential moving averages. The pair is now trading between the 50% and 38.2% Fibonacci Retracement level. I expect the pair to retest the 38.2 retracement level at around 1.2217. Alternatively, the pair may move upwards and retest the 50-day EMA at 1.2500.