The services sector has room for an upside surprise, boosting the dollar

  • Markit’s services PMI is expected to rise to just 53 points, barely in growth territory.
  • The larger US sector likely rebounded much faster from the Omicron-related slowdown.
  • Data from Germany and France also point to a robust rebound in the sector.
  • The dollar has room to rise in response to the data.

Hold your horses, Mr. Putin – for a few minutes, markets should turn away from the geopolitical drama and take a look at fresh economic data. Markit’s preliminary Purchasing Managers Indexes for February will provide insight into the post-Omicron world. Covid is still raging, but at a much lower rate than before. By how much, that is the question.

The focus is on the service sector which has been affected by the rapid spread of this contagious variant of coronavirus. Consumers limited their visits to physical stores, hair salons and restaurants. While this did not hurt online shopping in January – according to retail sales figures – it weighed on sentiment.

Staffing shortages due to the virus and the “big quit” were also factors that pushed the services PMI down to 51.1 in January. Economists predict a rebound in February, but only to 53 points. Although this figure reflects expansion – the threshold is 50 – it is a far from the levels above 60 recorded earlier in the post-pandemic recovery.

Here are the evolutions of the Markit PMI Service:

Source: FX Street

Another fact that is essential to take into account concerns the figures of other countries that have also suffered Omicron waves. The PMI for French services stands at 57.9 points against 53.6 it was expected. Germany’s figure came in at 56.6, well above the 53 forecast. And in the United Kingdom, where the economy is as dependent on services as the United States, it came out at 60.8 against 55.5 expected.

All in all, there is room for a good surprise on the upside.

US dollar reaction

As mentioned earlier, investors are focusing on events in Donbass, eastern Ukraine. Statements by Russian President Vladimir Putin and his Western counterparts are also making headlines, as are movements in other parts of the globe. However, Markit’s Services PMI should trigger a market reaction.

A better-than-expected figure will likely push the dollar higher, as it would increase the odds of a double-dose rate hike by the Federal Reserve. Moreover, it would go with the current feeling of risk aversion driven by geopolitical fears.

In the unlikely event of a disappointing data point, the greenback would suffer a slight decline.

Final Thoughts

Markit’s services PMI may surprise on the upside, boosting the dollar in the near term, until investors refocus on the Russia-Ukraine standoff.

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