British Pound Drops as UK Services Sector Shows Signs of Slowing
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
The British pound (GBP) fell sharply this week after new data signaled that the UK’s crucial services sector—which makes up nearly 80% of the nation’s GDP—is beginning to lose momentum. The S&P Global/CIPS Services PMI dropped to 50.1 in July, barely above the expansion threshold and well below forecasts of 52.5.
Markets responded swiftly to the news, with the GBP/USD pair falling below $1.27, marking a two-week low. The GBP/EUR also saw a decline, losing 0.3% on the day, as investors adjusted their expectations for future interest rate hikes from the Bank of England (BoE).
“The services sector has been a pillar of resilience for the UK economy in the face of high inflation and interest rates,” said Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics. “But this reading suggests cracks are starting to form, and consumer demand may be softening more than expected.”
The slowdown is attributed to rising borrowing costs, persistent cost-of-living pressures, and increased business uncertainty, particularly around the upcoming general election. Several respondents in the PMI survey cited a “marked slowdown in new business” and “client hesitation on long-term projects.”
This decline in the services sector puts additional pressure on the Bank of England, which is already facing a delicate balancing act. Inflation, although falling, remains above the 2% target, standing at 3.2% year-over-year. However, the central bank may be forced to pause or delay further rate hikes to avoid triggering a broader economic downturn.
Currency analysts believe this marks a turning point for the pound. “The BoE will now have to factor in weakening growth alongside sticky inflation. That’s a tough spot,” said Jane Foley, Head of FX Strategy at Rabobank. “Unless incoming data improves, the pound could see more downside risk.”
Adding to the bearish sentiment is the strength of the U.S. dollar, which has been supported by stronger-than-expected GDP growth and hawkish comments from Federal Reserve officials. As a result, the yield differential between UK and U.S. bonds has widened, further hurting the pound’s appeal.
From a technical standpoint, the GBP/USD pair is now testing key support near 1.2650. A break below this level could trigger a move toward 1.2550, analysts warn. Meanwhile, options traders have increased bets on downside moves in GBP over the next three months.
In summary, while the UK economy had shown signs of resilience in recent quarters, the latest services data casts doubt on that narrative. With uncertainty looming and the BoE facing conflicting economic signals, the pound may continue to struggle in the short term.
