The pound sterling held firm against the euro and US dollar on Wednesday after the UK services sector contracted less than expected and the yields on UK government bonds hit highest level since 1998.
The yield, or interest rate, on 30-year UK gilts, was at 5.115%, according to Refinitiv data, as traders believe inflation will be more sticky.
There was a wider sell-off in the bond market. US treasuries led a selloff in debt markets following stronger-than-expected job openings data. US Treasury yields hit their highest since 2007 amid fears the Federal Reserve will keep borrowing costs painfully high for longer than hoped.
Earlier, the S&P Global Services PMI for September was upgraded to 49.3, from 47.2 in the first estimate, a good revision higher but still at its weakest performance in in eight months.
Read more: UK government bond yields highest since 1998
"Service sector activity remained on a negative trajectory in September as cutbacks to non-essential business and consumer spending weighed on sales volumes. Although only modest and slower than indicated by the earlier 'flash' PMI reading, the downturn in UK service sector output was the greatest seen since the beginning of this year and stood in contrast to solid growth during the spring months,” S&P Global said.
Meanwhile, the Composite PMI, which adjusts the services, construction and manufacturing PMIs to give a more accurate snapshot of the broader economy, was revised higher to 48.5 from 46.8 in the first estimate, suggesting a mild contraction in the UK economy given the readings are still below 50.
Matthew Ryan, head of market strategy at financial services firm Ebury commented on the sterling’s strength against the USD, and also noted the upward revision in UK GDP data, and why he believes a December rate hike is likely.
“Last week’s upward revision to UK GDP data has provided reason for optimism, albeit a lack of confidence that the Bank of England will deliver additional interest rate hikes has kept the pound pinned around 6-month lows.
“While investors see little chance of another BoE hike at the next MPC meeting in November, we are still pencilling in one more rate increase in the current cycle, potentially in December, which we think would be bullish for GBP. “
He also noted that upside in the UK currency appears relatively limited “given the rather bleak economic outlook, and the lingering possibility of a recession in early-2024”.
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