UK recessionary risk


Sterling made a return to underperforming ways after much worse than expected manufacturing and construction PMI data, which were followed up by some dovish remarks from BoE Governor Carney late yesterday. Meanwhile today, the June UK services PMI disappointed.

The data fell to 50.2, a 3-month low and dropfrom May’s 51.0 reading. The median forecast had been for a more modest decline to 50.6. The indicator signals stagnation, with the sector only expanding fractionally. Sluggish domestic conditions and greater risk aversion due to prolonged Brexit and associated political uncertainty among clients were highlighted by respondents.

The details of the report showed that volumes of new work have fallen again, with this metric now having shown a reduction in five of the last six months. This has contributed to an ongoing decline in unfinished business, which has now fallen by the longest stretch since 2011-12. One positive was a rise in employment, which was driven by the filling of long-term vacancies. The June composite PMI worked out at 49.2, dropping sharply from May’s 50.7, dragged lower by weak construction and manufacturing components. This is the first time since July 2016 that the composite PMI has been below the 50.0 mark.

Overall, the June PMI data paint a picture of an economy in stagnation and at risk of tipping into recession; a consequence of both Brexit-related uncertainty and slowing economic activity in continental Europe.

Cable extended lower earlier, to a 12-day low at 1.2565, while EURGBP inched nearer to 6-month high territory. Another pair that hit 6-month low was GBPJPY,which is currently trading at 135.38. The asset seems to be driven by a renewed negative bias, as the medium term Bollinger Bands pattern are extending further to the downside once again. The asset has been in a bearish channel since the end of January 2018.

Hence as the asset has failed to sustain a movement above 136.00 area the past few days, and as the downside momentum look to be growing again, the next levels to be watched are 133.80 (latest weekly fractal), 132.30 (127.2 Fib. Extension from since the 2018 decline and also December’s low) and 129.00 (2016’s Support). Immediate Resistance is set at 138.30 (5-week peak), 139.00 (50-day EMA) and 139.88 (6-month Support during 2018).

Momentum indicators are supporting the negative outlook in the near term but also medium term as well, as  MACD lines are moving southwards under neutral, while RSI slipped lower again and currently retesting 30 barrier with further space to be covered to the downside.

Nevertheless, the UK currency has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016, and we still cannot see much scope for this to reverse anytime soon. As for Brexit, the news flow has remained quiet in terms of substantive developments. That will change as soon as the new prime minister, most likely no-deal-Brexit-if-necessary Boris Johnson, takes up the reins (which should be by mid month).

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Andria Pichidi

Market Analyst

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