New Log Draft   Log In / Sign Up Members

Pound Sterling recovers sharply on strong UK preliminary Services PMI

Article
FXStreet in Market News 12 385723
April 23, 2024 19:02

content provided with permission by FXStreet

  • The Pound Sterling rebounds from 1.2300 on robust increase in UK Services preliminary PMI for April.
  • The UK preliminary Services PMI data surprisingly jumped to 54.9 from 53.1
  • Two BoE policymakers are lined up to speak as investors seek clues about the interest-rate outlook.

The Pound Sterling (GBP) bounces back from 1.2300 in Tuesday’s London session as the S&P Global/CIPS has posted stronger-than-expected United Kingdom preliminary Services PMI data for April. Surprisingly, the Services PMI jumped to 54.9 from the prior reading of 53.1. Investors forecasted the Services PMI to drop slightly to 53.0. The preliminary Manufacturing PMI, surprisingly contracted, remains below the 50.0 threshold that separates expansion from contraction after expanding in March. The factory PMI falls sharply to 48.3 from expectations and the prior reading of 50.3.

The agency reported that lower output levels were often linked to weak market conditions and customer destocking in response to reduced demand. In April, new business volumes increased across the private sector as a whole. The growth rate was the strongest since May 2023, but the expansion was centred on the service economy as manufacturers saw a moderate downturn in order books.

The GBP/USD pair recovers as strong Services PMI has fuelled strength in the Pound Sterling. Also, the decline in the US Dollar (USD) has provided some support to the GBP/USD pair. The US Dollar dips despite expectations that the Federal Reserve (Fed) will maintain interest rates at their current levels for longer. United States Consumer Price Index (CPI) has turned out hotter-than-expected in the first three months of the year and the county’s economic outlook is strong, suggesting that current interest rate framework is appropriate. 

The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, edges down to 105.90. Meanwhile, investors will shift focus to the core Personal Consumption Expenditure Price Index (PCE) data for March, which will be published on Friday. The monthly core PCE Price Index is estimated to grow steadily by 0.3%. Annually, the underlying inflation data is expected to soften to 2.6% from 2.8% in February.

Daily digest market movers: Pound Sterling rises while US Dollar edges down

  • The Pound Sterling bounces back after refreshing a five-month low near the round-level support of 1.2300 on upbeat UK preliminary Services PMI for April. However, its near-term outlook remains vulnerable as investors see the Bank of England (BoE) pivoting to interest rate cuts sooner than the Fed. Last week, BoE Deputy Governor Dave Ramsden said that United Kingdom inflation will decline faster than expected and return to the 2% target in May.
  • Dave Ramsden said: “Over the last few months, I have become more confident in the evidence that risks to persistence in domestic inflation pressures are receding, helped by improved inflation dynamics,” Reuters reported. He added that inflation might prove weaker than BoE’s latest projections.
  • Ramsden’s soft guidance on the inflation outlook has prompted expectations that the BoE will start reducing interest rates earlier than expected. LSEG’s (BOEWATCH) now prices 28 basis points (bps) of rate cuts in August and 56 bps in December versus 22 bps and 51 bps, respectively, at Friday’s close, Reuters reported.
  • Market expectations for the BoE’s May policy meeting will be guided by commentaries from policymakers, as inflation data for the same month will be released after the interest rate decision. In Tuesday’s session, the speeches from BoE policymakers Jonathan Haskel and Huw Pill will be the focus. 
  • In March’s monetary policy meeting, Haskel, who remained a hawk, surprisingly voted for keeping interest rates unchanged at 5.25%. In early April, Haskel commented that rate cuts should be “a long way off.” He added that the decline in headline inflation is good news, but the BoE cares more about the persistent and the underlying inflation, the Financial Times reported. High inflation in the UK economy has been majorly driven by persistent inflation in the service sector, which is fuelled by strong wage growth. In March, the annual Service inflation decelerated slightly to 6.0% from 6.1%. 

Technical Analysis: Pound Sterling recovers from five-month low near 1.2300

The Pound Sterling printed a fresh five-month low near 1.2300 on Monday. The GBP/USD pair extends its losing spell for fourth trading session on Tuesday as a breakdown of the Head and Shoulder chart pattern formed on a daily timeframe has weakened the near-term outlook.

Declining 20-day and 50-day Exponential Moving Averages (EMAs) at 1.2525 and 1.2600, respectively, indicate that the long-term outlook is bearish.

The 14-period Relative Strength Index (RSI) oscillates in the range of 20.00-40.00, indicating a strong bearish momentum. 

Pound Sterling FAQs

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.