UK service PMI to highlight negative impact of Brexit uncertainty - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the Cable has been one of the hardest hit crosses by the recent rebound in the US dollar falling sharply after an intra-day high early this week at 1.4770.

Key Quotes

“It provided a good example that US dollar weakness was becoming excessive in the near-term as it is hard to justify cable at close to flat on the year in terms of performance as the threat of Brexit looms ever closer on the horizon. As a result the balance of risks has become even more skewed to the downside for cable ahead of the referendum.

The recent bounce in cable was driven by a recent pick-up in support for “Remain” in the public opinion polls but even that appears to have proven only temporary. More recent polls have reverted back to showing that support remains evenly split looking at the average results of the last six polls. The underlying trend since late last year has been increasing support for “Leave” both in online and phone polls.

It is also becoming clearer that the heightened uncertainty ahead of the referendum is beginning to have a more marked negative impact of the performance of the UK economy. The release today of the latest services PMI survey will be watched closely to see if it repeats the larger than expected declines recorded in both the construction and manufacturing PMI surveys for April.

The surveys are signalling that the UK economy is likely to slow more sharply in Q2. However, it remains more difficult to ascertain whether there is also an element of underlying slowdown as well which is separate from the Brexit uncertainty. In these circumstances, it is prudent for the BoE to remain in wait and see mode until after the referendum has passed before materially altering their outlook for monetary policy.”