Service Sector Rebounds

There was some better news for the UK over the early European session today. The IHS reported that the UK services sector finally rebounded into expansionary territory last month, marking an end to almost six months of contractionary readings since October. Despite the data coming in a little below the expected 56.8, at 56.3, the sector is firmly back above the neutral level and saw a sharp improvement on the prior month’s 49.5 reading.

Given that services make up around 80% of the UK economy, this can perhaps be seen as a watershed moment in the recovery given that the services sector has long lagged the factory sector, which saw a swift and continued recovery from the lows seen during the height of the pandemic.

New Orders & Employment Rise

Looking at the breakdown of the report, the IHS noted that there had been a strong rebound in new orders over March, with employment rising sharply also, ahead of the planned easing of restrictions to begin in April. Indeed, the job creation seen in the services sector in March represents the first overall expansion in staffing levels since the pandemic began.

Activity Forecast To Pick Up Further

On a particularly encouraging note, the survey data showed that 66% of those who responded forecast an uptick in activity over the coming period versus only 8% who predict a decline. Interestingly also, the data showed that some areas of the services sector recorded the positive impact from higher residential property transactions.

The main upside contribution came from the much firmer levels of client demand and forward bookings as consumers look ahead to the easing of lockdown restrictions from April onwards at which point the hospitality sector will start to open up.

Input Price inflation Soaring

There were also signs of increased price pressures in the data, helping feed into the view that inflation is likely to spike sharply once reopening begins. The data showed that there was a sharp uptick in input costs with the rate of input price inflation jumping the most in almost three years.

Looking ahead, these greater input costs are likely to be passed onto the consumer, whilst also meeting the level of pent up demand among consumers on the back of lockdown, which should further fuel a lift in inflation supporting GBP in the near term.

Technical View

EURGBP

The sell-off in EURGBP since the December highs has seen price breaking through several key support levels as the bear channel extends. Price is now retesting the channel high and broken support at the .8591 level. While this region holds, the medium-term focus is for a continuation towards the .8277 level. However, above the channel, .8678 is the next objective for bulls.

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