UK Services PMI in Focus Today

UK Services PMI will be the main focus for GBP today. A small decline from September numbers is expected but with the PMI expected to remain above the 50 level – still in expansionary territory, GBP should remain well supported. The BoE MPC announcement on Thursday will be key focus this week. There have been various comments from BoE members of late, putting greater emphasis on the significance of the FLS which has seen a majority of forecasters and our economists expect no further asset purchases to be announced at this meeting. However, with the weak global activity weighing on the domestic outlook there remains a slight possibility they could provide further stimulus, which could see GBP on the back foot for the first part of the week. The overnight release of the Lloyds Consumer Barometer showed that both the job prospects and job security indices rose further in October. This pointed to the recent improvement in the UK labour market continuing into the autumn.

Later on this morning, the services PMI for October will be released and will provide one of the last pieces of evidence the MPC sees before making its QE decision on Thursday. In September, the index slipped to 52.2, undoing much of August’s rise, more obviously associated with a temporary Olympic boost. Lloyds TSB forecast a further decline in October, although believe domestic conditions are improving, which should cushion the fall relative to the more externally exposed manufacturing sector. Lloyds TSB expect the index to fall to 51.8 from 52.2. Such a level has historically been consistent with services output growth (ex government and distribution) of 0.3%. It is also higher than levels that have prompted the MPC to undertake further QE in the past – just. However, the outlook remains uncertain and a further drop in the index below 51.8 would start to signal more concerning signs of softening.

EUR/USD continued to drift lower on Friday, in part due to concerns about Greece, but also following stronger US data. There are key events from Europe this week, with Greece the main focus. The latest schedule suggests Greece will vote on new austerity measures late Wednesday evening, followed by the 2013 budget vote on Sunday before the pre-scheduled Eurogroup meeting on 12th November. But with still uncertainty whether the votes will pass, we expect EUR/USD downside bias to continue, with some support around the 1.2800/30 area. Not much is expected from the ECB meeting on Thursday, there is little more Draghi can add after announcing the framework for OMT purchases, and we continue to wait for Spain’s request for EU assistance.

In the US, the non-manufacturing PMI will provide some distraction ahead of the elections. The headline index rose to 55.1 in September, above market expectations and to its highest level since March. Lloyds TSB expect this to ease back to 54.1 in October, yet this would still be consistent with moderate expansion in Q4 US GDP. USD made gains on Friday after the strong payrolls report. While the unemployment rate rose as expected, payrolls was stronger than expected up 171k. The better employment number is positive for the US outlook and with underlying growth looking comparatively better in the US than in the Eurozone, and with event risk from Greece this week, USD looks set to remain firm against EUR. There remains uncertainty surrounding tomorrow’s US election; the latest polls shows it remains extremely tight between Obama and Romney, which could see markets cautious today. We see potential for further USD gains, but the 80.60/70 area should see some initial resistance.

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