GBP/USD craters as UK services PMI point to a worrisome recession

The GBP/USD pair declinedafter Markit released disappointing construction, services, and composite PMI data from the UK.

UK services PMI decline

According to Markit, business activity in the services sector declined to a record low of 13.4 in April. This was slightly higher than the previously-released flash PMI number of 12.2.

This unprecedented decline happened because small number of essential service companies opened in April. As such, some industries like tourism, travel, restaurants saw little to minimal activities during the month. This led to a record low decline in new business volumes, backlogs, and employment in the private sector. In a statement, Markit’s Tim Moore said:

“Just one-in-five service providers managed to avoid a drop in business activity since March, and those hardest hit by social distancing measures and travel restrictions often reported complete stoppages of business operations.”

The UK PMI document showed that most businesses saw a drop in activity in April. This was almost double the survey-record in March. Similarly, most companies indicated a decline in payrolls during the month.

Similarly, the composite PMI dropped to 13.8 from the previous 12.9. This was the worst reading since the company started to collect the data. According to Markit, the composite PMI are indices that measure the performance of services and manufacturing.

UK economy impacted by coronavirus shutdown

The services segment is very crucial for the UK economy. According to the Office of National Statistics (ONS), the sector represents more than three-quarters of the UK GDP. It employs millions of people in sectors like travelling, hospitality, finance, and tourism, among others. Therefore, a contraction in the sector is an important sign of how deep the UK economy will sink.

Analysts expect the UK economy to decline by double digits this quarter. A report by the OBR predicted that the economy would shrink by 35% in the quarter and by 13% in 2020. Another report by the Centre for Economics and Business Research (CEBR) said the country would contract by 15% in the quarter.

Another report by Society of Motor Manufacturers and Traders (SMMT) said that new auto registrations in the UK dropped by 97% in April. This followed a 37% decline in March. Similarly, commercial vehicle production declined by more than 47% in April.

GBP/USD falls ahead of BOE interest rate decision

The market is watching the BOE interest rate decision, which will happen on Thursday. Analysts polled by Bloomberg expect the bank to leave rates unchanged. Most analysts also expect the bank to commit to more asset purchases in addition to the £200 billion that was announced in March.

According to ING, the bank does not be in a rush to expand the target of the QE this week. This is mostly because the bank is still significantly below the £645 billion ceiling the bank has set for itself.

Analysts also expect the bank to talk about its support for vulnerable companies through the commercial paper (CP) purchases. The program is aimed at helping provide finances to companies because investors were rushing for cash during the peak of the virus. Recent data show that the bank has acquired CP worth more than £15.9 billion. In contrast, its CP holdings peaked at £2.3 billion in the last financial crisis.

GBP/USD technical analysis

The GBP/USD started the month on a gloomy note, losing more than 1% of its value as the market remains concerned about Brexit and the state of the UK economy. As I wrote on Sunday, more hedge funds and other speculators have increased their bearish bets on the British pound.

The daily chart shows that the GBP/USD pair is on the third day of straight declines. The pair is along the 50-day Fibonacci retracement level and the 25-day EMA. Therefore, I expect the pair to continue moving lower if it manages to move below the 50-day EMA at 1.2445. On the flip side, this thesis will be invalidated if the pair moves above the Thursday’s high of 1.2642.