Pound US Dollar (GBP/USD) Extends Upside despite Positive US PMIs
(Updated 15:55, 21/2/23) The Pound US Dollar (GBP/USD) exchange rate continued to climb today, spurred on by this morning’s strong UK PMI results. With Britain’s vital services sector having returned to growth this month, investors are hopeful that the country’s economy is resilient enough to avoid a recession.
Additionally, signs of economic strength and persistent inflationary pressures may encourage the Bank of England (BoE) to continue raising interest rates. This also boosted the Pound (GBP).
Later in the afternoon, GBP/USD looked like it was going to trim its gains after the US PMIs were published. The American data also exceeded forecasts, indicating a strong US economy and boosting bets on sustained rate hikes from the Federal Reserve.
However, the US Dollar’s (USD) upside was short lived. The Pound regained the upside to refresh its six-day high. It’s unclear why the ‘Greenback’ slipped, as the positive data and downbeat market mood would usually work in the safe-haven currency’s favour.
At the time of writing, GBP/USD is trading at $1.2135, having gained an impressive 0.8% since this morning’s opening levels.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Climbs as UK Data Exceeds Expectations
The Pound US Dollar (GBP/USD) exchange rate leapt higher today as upbeat UK data eased recession fears and prompted fresh Bank of England (BoE) interest rate rise bets.
At the time of writing, GBP/USD is trading at $1.2115, up more than 0.6% since the start of today’s trade.
Pound (GBP) Firms following Strong UK PMIs
The Pound (GBP) surged higher on Tuesday morning after the UK’s flash PMIs for February smashed forecasts.
The manufacturing survey rose from 47 to 49.2, much better than the expected score of 47.5. Meanwhile, the services sector unexpectedly returned to growth, jumping from 48.7 to 53.3, rather than 49.2. A score below 50 represents contraction, while above 50 points to expansion.
The surprise recovery in service sector activity is particularly important, as the sector accounts for nearly 80% of total UK economic output. Investors believe the strong data may mean the UK could avoid a recession this year, while it also creates more room for the Bank of England to continue hiking interest rates.
In addition, the PMIs contain evidence that inflationary pressures remain high, particularly in services, which may prompt more action from the BoE.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence – the organisation that conducted the surveys – commented:
‘[W]hile the data suggest that near-term recession odds have fallen considerably, elevated inflation pressures clearly remain a concern, especially in the service sector. As such, the resilience of the economy and the stickiness of the survey’s inflation gauges add to the likelihood of the Bank of England tightening policy further, and potentially more aggressively’.
The expectations of more interest rate rises and hopes of a stronger UK economy saw Sterling jump higher.
US Dollar (USD) Cushioned by Risk-Off Trade
Meanwhile, the safe-haven US Dollar (USD) may be managing to resist steeper losses thanks to a risk-off market mood. Although USD is falling against the Pound, it’s up against many of its other peers.
Global investors are somewhat downbeat today, following a bellicose speech from Vladimir Putin. Many expect Russia to ramp up its invasion of Ukraine this week, with a fresh offensive coinciding with the start of the war one year ago.
Geopolitical tensions are rising elsewhere, too. Relations between the US and China continue to sour, with each superpower supporting opposite sides in the war between Ukraine and Russia.
A generally downbeat tone today is seeing traders play it safe by investing in the US Dollar. However, these safe-haven flows aren’t enough to lift USD against GBP.
GBP/USD Exchange Rate Forecast: US PMIs to Surprise to the Upside?
Looking ahead, the S&P Global PMIs for the US are due out this afternoon. Although not as impactful as the ISM releases, they could still have an effect on the ‘Greenback’.
Economists expect both services and manufacturing activity to have improved in the US this month, although they are forecast to have remained in contractionary territory. As the UK PMIs surprised to the upside, along with the Eurozone composite PMI, investors may be expecting the American scores to also exceed estimates.
If they do, USD could strengthen. However, if they suggest that the US private sector is on course for a contraction this month then the ‘Greenback’ could slip, prompting further gains for GBP/USD.