Brexit begins biting and GBP/USD may suffer – UK Services PMI analysis

• UK Services PMI entered contraction territory for the first time since 2016.
• It implies Brexit is already biting the real economy. 
• GBP/USD is focused on Brexit headlines rather than the economy, but this could hurt.

Markit’s forward-looking Services Purchasing Managers’ Index for March plunged to 48.9 points, below the 50-point threshold that separates growth and contraction. The services sector is the UK’s largest and includes the financial sector.
The sub-50 score was last seen in July 2016, immediately after the EU Referendum, and Brexit is the reason for the drop this time as well.

The publication concludes the series of three PMIs. The first one, for the manufacturing sector, stood at 55.1 points, which represents satisfactory growth. However, it was due to stockpiling ahead of Brexit. Construction PMI did not disappoint, but was at 49.7, slightly within contraction territory.

This puts the composite PMI at precisely 50. Analysts at Markit explain that the data implies flat growth in the first quarter of 2019 and the downturn in March could continue.

GBP/USD dropped from the highs in the immediate reaction, but the impact was short-lived, as with other economic indicators. As expected, the Services PMI was a temporary distraction from Brexit, but not a positive one.

The focus is on Brexit news, not the damage that it already does before it happened. Markets still hope for a breakthrough after PM Theresa May reached out to opposition leader Jeremy Corbyn.

No BOE hike even on a positive Brexit solution?

However, economic dynamics have a life of their own. The Bank of England would have raised rates if it were not for Brexit uncertainty. But now, even if a solution of sorts is found, the damage to the economy is already real.

Governor Mark Carney and his colleagues may decide against a rate hike later this year as the economy loses momentum and even risks a recession.

Downbeat data could down GBP/USD just a bit for now but could have a more detrimental impact later on.