The U.K. pound traded sharply lower against the U.S. dollar Tuesday after a key reading of activity in the country's services sector, the largest portion of the British economy, slowed to the lowest level in nearly three years last month amid the uncertainty surrounding Britain's exit from the European Union.
The IHS Markit services PMI reading slipped to 50.1 points last month, the lowest since July 2016 -- the month following Britain's Brexit referendum -- and only a fraction higher than the 50 mark that separates growth from contraction. IHS Markit said the employment portion of the reading actually pierced that mark, falling to 49.3 points, the lowest since October 2012.
"The latest PMI survey results indicate that the UK economy is at risk of stalling or worse as escalating Brexit uncertainty coincides with a wider slower slowdown in the global economy," said IHS chief economist Chris Williamson. "With the exception of July 2016, when demand contracted briefly following the surprise Brexit vote, service providers suffered the largest drop in new business since April 2009 as customers tightened their belts."
The pound fell 0.3% against the U.S. dollar to trade at 1.3015 immediately following the release, sending the currency below its 200-day moving average, a move that investors usually cite as a bearish signal for near-term performance.
The UK labour market is deteriorating: #PMI surveys showed companies cutting headcounts in January to the greatest extent since November 2012 as #Brexit uncertainty intensified and order books contracted pic.twitter.com/AnyzKa81iU— Chris Williamson (@WilliamsonChris) February 5, 2019
The IHS reading comes just days ahead of the Bank of England's next rate decision, set for noon London time Thursday, as Governor Mark Carney grapples with the impact of slowing growth linked to Britain's impending EU exit and the prospect of rising inflation as global energy prices increase and the pound weakens.
"From the day after the referendum we've been preparing for Brexit, no matter what form it takes, if you're a central bank the easiest thing and the most important thing is to prepare for a hard Brexit with no transition," Carney told the World Economic Forum last month. "So that's what we've been preparing the (financial) sector for."
Britain is slated to leave the European Union on March 29, but has yet to agree terms of its withdraw with Brussels, casting doubt on what sort of arrangement the two trading partners will have once the exit is completed.
Prime Minister Theresa May, who pushed for an agreement that included maintaining similar access to the EU single market for goods, suffered the biggest Parliamentary defeat in history last month when lawmakers rejected that arrangement over concerns for the fate of Northern Ireland -- and its border with the Republic of Ireland -- after Brexit.
May was told by lawmakers to return to Brussels to seek further assurances on the border issue, as well as guarantees that a hard-border won't be put in place if Britain and the EU can't agree a long-term trade deal, even as EU officials insist that it won't re-open negotiations after months of painstaking brinksmanship with the Prime Minister and her Brexit team.