UK data weakens, Sterling remains Brexit focused


The UK’s September services PMI disappointed, unexpectedly falling below the 50.0 growth/expansion divide to a headline reading of 49.5, dropping from August’s 50.6. The median forecast had been for a 50.3 outcome. Both new and outstanding business declined, while job cutting was at the quickest pace seen since August 2010. Ominously, the report found evidence that international clients had switched business to other markets amid increased concerns for the UK leaving the EU without a deal. The month-on-month fall in the index for new export business fell at its sharpest pace since the series began in September 2014. The composite PMI fell to 48.8 in September from 49.7 in the month prior — the first back-to-back contraction in the all-sector measure since the last two months of 2012. Among a slow of worrisome details, the September PMI surveys found employment contracting at its fastest pace since December 2009, the days of the Great Recession, with job losses in the service sector declining having hitherto been holding up while jobs in the construction and manufacturing sectors declined. Overall, the data should further facilitate a dovish-turn-in-progress at the BoE.

The Pound has hunkered down above recent lows seen against the Dollar and Euro, even following the woeful PMI report. The UK government has given the EU its Brexit proposals on a divorce plan leans heavily on technological solutions to achieve the aim of ensuring that there is no hard border between Ireland and Northern Ireland and that the integrity of the single market is maintained. And the response has been… cool. It looks unlikely that it will allay Ireland’s concerns. And so, as things stand, it looks likely that Prime Minister Johnson won’t get a deal by October 19, and the new law requiring an extension in Brexit to January 31 will kick in. Johnson has continued to assert that the UK will leave the EU on October 31 without a deal if necessary, despite the new law (the Benn bill). We presume this essentially an empty threat given the Benn bill.

There has been speculation that the PM might be looking to take the UK out of the EU without a deal on a technicality, and opposition parties are plotting to head-off this risk off by taking the government down with a confidence motion — and they have the numbers — putting in a interim government, secure a delay in Brexit to January 31 and then organize a general election for November or early December. In the event that Johnson’s Conservative Party won the election (which, judging by polling, is quite possible in the UK’s first past the post electoral system) they the same intractable Irish border problem will be faced all over again. But, with a majority in Parliament, Johnson would in this scenario, be able to take the UK out of the EU without a deal.

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Stuart Cowell

Head Market Analyst

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