Austerity Measures Weighing on U.K. Economy But Could Strengthen Pound
Fri, Sep 3, 10:51 AM ET, by ForexTraders.com
The U.K. released Services PMI during the London session Friday morning. The expected figure was 53.1, but the actual release disappointed slightly to the downside at 53.0. The purchasing Manager's Index is considered a leading indicator of economic health and any number above 50 denotes expansion while any number below 50 denotes contraction.
Thus, breaking down the pound reading, we can see that the number does show expansion, but it is expanding at a slower than expected pace. This is in line with many analysts thoughts concerning the U.K. economy. Prime Minister Cameron has been aggressively slashing the budget deficit by cutting back on spending, and many economists have been concerned that this decrease in spending will weigh heavily on U.K. economic growth in the near-term.
The U.K. public, however, is loving the cuts. Credit Ratings Agencies such as the S&P have warned the U.K. that if they did not reduce their deficit considerably, they could be in danger of losing AAA credit status, which would weigh heavily on the country. AAA credit status comes with many perks, primarily very low interest rates for public debt, which is essential for a country to remain competitive economically.
This week has been quite a disappointing week for economic data out of the U.K. - Wednesday-Manufacturing PMI came out at 54.3 versus the expected figure of 57.1
- Thursday-Nationwide HPI came out at -0.9% versus the expected figure of -0.3%
- Friday-Services PMI came out at 51.3 versus the expected figure of 53.0
This steady stream of disappointing data out of the U.K. has caused the GBP/USD to move into a relatively tight zone of consolidation as investors are trying to make sense of the current economic picture around the world. There are lots of mixed signals in the economy at the moment; however, the GBP/USD should find a difficult time moving much higher in the near-term until some sort of positive note is sounded in the U.K.
The disappointing numbers out of the U.K. are quite in line with Central Bank and U.K. government expectations. The expectations in the U.K. is that the economy will enter into an extended period of very sluggish growth, which is what we are seeing now. They are not expecting any form of economic contraction, which would lead to a double-dip recession. Although Bank of England President Mervyn King has been very cautious concerning economic development in the U.K., he has made it clear they are expecting that the U.K. economy will continue to move forward, albeit at a very slow pace.
Due to the massive spending cuts and austerity measures, the U.K. most likely will not be engaging in another round of quantitative easing anytime soon, unless it become a matter of economic life and death, which at the moment it is not. If the U.S. does move forward with another round of quantitative easing, and the U.K. does not, and the U.K. economy is able to continue moving forward, then we could see a very strong rally in the pound versus the dollar in the coming months as investors begin to price in future monetary tightening cycles.
SDI Glossary: "price" Definition
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