Sterling’s rally capped by slowdown in UK services activity

Data this morning showed that growth in the UK services industry moderated slightly in July with the index dropping back to 53.1, its lowest level since June 2009.

However, the figure is still consistent with expansion in the industry, though at a more modest pace than had been expected. The data continues a steady decline in the rate of growth, which has now been the case for the past five months since it hit a peak in February. In the wake of the release, the pound, which is struggling for direction against both the euro and US dollar at present, has slipped slightly from its highs. The slowdown in activity was also seen in the UK's construction industry and comes as volumes of new business suffer from public sector cuts.

Duncan Higgins, senior analyst at Caxton FX says, "The continuing decline in the pace of expansion in the services sector, although modest, is not likely to see a turnaround any time soon. The government's spending cuts are clearly being felt and focus will soon turn to what further impact the upcoming Spending Review and VAT rise may have."

In response to the data the market has taken sterling lower, though the impact has been comparatively limited with central bank announcements from both the Bank of England and the European Central bank due to tomorrow.

"The uninspiring data has left sterling still searching for direction against the euro where the price continues to meander around 1.2050. The data hasn't helped the pound's near term prospects against the dollar, where the nine-day long rally was already looking stretched. The price is still holding around $1.59 but sterling has lost its momentum and fresh impetus will be needed to take the pound above the psychologically important $1.60 level," concludes Higgins.