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There was an unexpected piece of good news with yesterday’s services PMI surging to a 13 month high of 57.1 in March from 52.6 in February – with anything above 50 indicating growth. This 4.5 point rise in the index is the second biggest increase since the survey started in 1996, only exceeded in January this year, when activity rebounded strongly after December’s terrible weather. Although the bad weather continues to persist, in Glasgow at least, the improvement in the service sector is highly significant, as it makes up three quarters of the UK economy. In a sign of its importance, the data company Markit revised its UK growth forecast from 0.5% to 0.8% for the first three months of the year.
The service data also had some speculating whether this would be enough to convince the Bank of England to start raising interest rates – with the rate announcement due tomorrow. The minutes released from the last meeting showed that although members were keen to raise rates to tackle inflation, the GDP contraction in quarter four had them holding back for now. It remains to be seen whether the good service data along with the robust construction and still strong manufacturing data released in recent days is enough to convince them otherwise. It may well be the case that the MPC decide to wait and see if March’s data was blip or a marked resumption in growth in the service sector, which has to grapple with weak consumer sentiment and public spending cuts.
The euro zone also experienced a strong service sector performance in March with EU service PMI at 57.2. As discussed previously the disparity in the euro zone economic recovery is stark with the figures showing the German and French service sector booming while Ireland and Italy were slowing and Spain actually contracting. If, as expected, the European Central Bank raises interest rates tomorrow, it will make a difficult situation in the EU peripheral countries even worse.
In overnight trading the pound was relatively unchanged against the euro at 1.1423 with all eyes firmly fixed on the Bank of England’s and ECB’s rate decisions tomorrow. With the market expecting the ECB to increase rates by 25 basis points expect some weakness in the euro if this fails to materialise.
The pound made significant gains against the dollar in the last twenty four hours with the pound moving from 1.6150 to 1.6340 this morning. The stronger than expected service data adding support for the pound and a statement by the Fed’s William Dudley warning about over optimism in the US economy weakening the dollar.