As Theresa May continues to battle to deliver her Brexit vision, the impact of the ongoing struggle is becoming clear. GBP continued its slide against the U.S. dollar this morning as the latest PMI data sets for the U.K. came in below expectations.
Brexit Taking Its Toll
The services PMI for January fell to 50.1 from 51.2 prior, undershooting expectations of a 51 reading. The U.K. composite PMI also fell lower in January to 50.3, below both the expected 51.5 reading and the prior 51.4 reading.
The Services PMI is now at its lowest level since July 2016 and is currently only barely above contractionary territory. With the service sector accounting for the vast majority of the U.K. economy, this is worrying news for investors and the BOE alike.
Although the U.K. has displayed resilience in the wake of the June 2016 Brexit referendum, defying the many gloomy forecasts made at the time, the last six months of heightened uncertainty around Brexit negotiations are starting to take a visible toll on economic indicators.
Traders Expecting Cautious BOE Tone
With Brexit negotiations still on a knife-edge, just eight weeks ahead of the official deadline for the U.K.’s departure from the EU, traders are expecting a cautious tone from the BOE at its rates meeting this week.
The BOE has made it clear that it wishes to pursue further monetary policy tightening. However, it has acknowledged the two-way risks around Brexit, and the need for a reactive policy approach should negotiations fail, with Britain ending up leaving the EU without a deal.
Technical Perspective
GBP/USD is now testing the 1.3004 support level. If we break lower than here, the next level to watch will be a retest of the broken, falling wedge pattern high, with deeper structural support at the 1.2693 level.
If price can remain above the broken bearish trend line, the focus will be on a further move higher, with bulls looking for a break of the 1.3304 level next.