Strong figures released today for Services PMI have eased fears that the UK may be headed back into recession. The Pound to US Dollar Exchange Rate has boomed this week and today’s results have only added to the growth. The GBP/USD rate currently stands at 1.583 (12:41 GMT).
Purchasing Managers’ Index (PMI) for services grew to 56.0 in January from 54.0 in December. This is the fastest expansion in 10 months and surprised analysts who had predicted a fall of 0.5 to 53.5 for the figure. Gross Domestic Product (GDP) in the UK fell by -0.2% in Q4 last year, so any negative growth would bring about another UK recession.
A recession is defined as 2 consecutive quarters of contraction – for example a decline of -0.1% GDP in Q1 following the -0.2% contraction in last year’s Q4 would technically be classed as a recession. Although there are many implications of an economic recession, its fundamental definition is not actually as daunting as its common portrayal in newspapers and political discourses. Often the psychological impact of being ‘under recession’ creates a self-reinforcing downward spiral, where companies are reluctant to invest in staff or assets and consequently fail to grow. Consumers are reluctant to spend and the spiral of contraction continues, in many cases a ‘business as usual’ approach would suffice and the extent of the trouble would be cut short sooner rather than later.
The Pound to US Dollar Exchange Rate reached a daily high of 1.586, but strong topside resistance was seen around 1.595 – the 200-day moving average which has not been breached since October.
US non-farm payrolls released later on this afternoon are predicted to detail an increase of 150,000 jobs to keep the unemployment rate at a steady 8.5%. If unemployment increases expect Sterling to make a run for the 1.595 mark. The Pound should remain relatively well bid even if stronger than expected US figures are announced, due to a global risk-on sentiment and the Fed’s decision to keep interest rates low in the US until the end of 2014.