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Pound in Focus Ahead of UK Service Sector PMI & Brexit Negotiations
US equity indices gained ground overnight, lifted by strong demand for tech stocks. M&A activity boosted sentiment with Microsoft taking a $7.5 billion bet on code-sharing site GitHub, whilst Apple and Amazon posted record breaking highs. The Dow closed 178 points higher, whilst the S&P added 0.8% and the Nasdaq 0.7% Despite a tech inspired rally on Wall Street, the focus switched back to fundamentals causing Asian markets to dip overnight, creating a drag on European futures, which were pointing lower on Tuesday.

A hat-trick of better than expected PMI’s?
Whilst both the manufacturing and the construction pmi headline figures have been better than expected, scratching beneath the surface of both data sets painted a less rosy picture. Today is the turn of the service sector. Investors will want to see signs that the service sector continued to rebound in May after harsh weather kept consumers inside earlier in the year. If the BRC retail sales figures and the Barclaycard figures are anything to go by then we could be in for a bumper month.
The BRC data showed that total retail sales values jumped by 4.1% in May, its biggest rise in over 4 years, whilst Barclaycard figures showed consumer spending increased by 5.1% year on year in May; its biggest jump in over a year. Both surveys showed that spending on non-essential items increased, which could be the first signs of pressure easing on squeezed households, as wage growth tentatively outpaces inflation for the second straight month.

BoE unsure of timing of next rate rise
The service sector pmi is forecast to show a slight up tick in May to 53 from 52.8 in April. A surprise to the upside could help restore some optimism in the path of rate hikes across the year, after BoE policy maker Tenreyro raised doubts over the timing of the next rate hike, saying it was still an open question. A strong reading could help lift the pound back towards resistance at $1.3380, after it fell sharply in the previous session.

Brexit back in focus
Concerns over Brexit, added to the pounds woes in the previous session, Brexit is back on the menu at the beginning of a crucial fortnight of Brexit negotiations in an attempt to end the current stalemate. Clarity on Theresa May’s Brexit plans and a breakthrough over the pressing Irish border issue are now essential if a solution is to be approved by EU leaders at the European Council summit at the end of this month. A sharp selloff in the pound on Monday suggests that traders are not expecting things to go that well. Negative Brexit headlines could wipe out any positivity from a forecasted increase in service sector activity.

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