Sterling buoyed by strongest Service Sector activity since 2006

Sterling made healthy gains Monday morning following the release of yet another better than expected purchasing managers index for last month. Following on from last week's better than forecast manufacturing and construction PMIs, the services sector didn't disappoint with a reading of 60.20, the highest since December 2006. The pound saw immediate gains of around 0.5% against both the euro and the dollar to the day's highs so far following the release.
 
After a strong second quarter with GDP growth of 0.6%, the third quarter has started even stronger and the word recovery would not look out of place against the numbers we seeing at the moment. Confidence levels are at the highest we've had for some years, which plays a large part in people's propensity to spend money and for companies to invest in the future. These could be the green shoots that have failed to blossom over the past four years.
 
To draw a comparison with the US economy, a key turning point there was when the housing market started to recover. There, like in the UK, the majority of people own their home rather than renting it from someone else so stabilisation of prices followed by increases gave a huge boost to confidence in the world's largest economy. The signals coming from the housing market here over the last three to six months have been of a pick up in the number of people looking to buy and of prices starting to increase. This should continue to support the increased confidence levels we're seeing currently and should contribute to more sustained growth.
 
Despite sterling having been the target of selling recently due to speculation over the Bank of England's new Governor's plans regarding monetary policy, it continues to find buying interest due to positive economic signs. Wednesday's quarterly inflation report will make for interesting viewing to get the Bank's take on the improving picture. Whilst we would caution against not expecting any more quantitative easing by BoE that could still weaken sterling further; we feel it has plenty of room to strengthen in line with the economy, particularly against the euro.

By Andy Scott, premier account manager at foreign currency exchange brokers HiFX.