Pound US dollar (GBP/USD) subdued near eight-week high amid slowing UK services inflation

Pound US dollar (GBP/USD) wavers as market sentiment offsets upbeat US data

(Updated 16:30, 23/05/2024) The pound US dollar (GBP/USD) exchange rate continued to trade without a clear direction throughout the afternoon despite some robust US releases.

The publication of the latest American preliminary PMIs indicated ongoing resilience in the US economy. The services sector surprised to the upside, printing at 54.8 in May, well above market projections of 51.3 and surging to a one-year high.

Similarly, the manufacturing index unexpectedly rose to 50.9, rather than holding steady at 50 in the same month.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

‘The US economic upturn has accelerated again after two months of slower growth, with the early PMI data signalling the fastest expansion for just over two years in May. The data put the US economy back on course for another solid GDP gain in the second quarter.’

In addition to this, the latest initial jobless claims for the week ending 18 May fell more than anticipated to 215,000, below market forecasts of 220,000, and retreating from the previous week’s upwardly revised 223,000.

However, despite the influx of strong domestic data, a cautiously upbeat market mood significantly capped the safe-haven USD’s upside potential.

Meanwhile, a notable deceleration in UK services inflation saw ramped up Bank of England (BoE) interest rate cut bets stifle the pound (GBP), as the latest preliminary services PMI fell to a six-month low this morning.

Moving forwards, the UK’s latest retail data is due for release tomorrow morning, could waning consumer activity dent Sterling?

At the time of writing, GBP/USD is trading at around $1.2711, virtually unchanged from today’s morning level.

Original article continues below:

Pound US dollar (GBP/USD) fluctuates following mixed UK PMI data

The pound US dollar (GBP/USD) exchange rate is wavering near a two-month high this morning following the UK’s latest purchasing managers index (PMI) prints.

At the time of writing the GBP/USD exchange rate is trading at around $1.2719, virtually unchanged from this morning’s opening rate.

Pound (GBP) stymied by services slowdown

The pound (GBP) is mostly subdued this morning following the release of the latest preliminary UK PMIs.

The manufacturing survey showed its strongest acceleration since July 2022 this month, with the index surprising to the upside at 51.3, surpassing market projections of 49.5 and leaping into expansion territory from last month’s 49.1.

Meanwhile, the services index softened in May, printing at 52.9, below forecasts of 54.7, and slowing from April’s one-year high of 55.

Analysts have since mulled over possible Bank of England (BoE) responses to the data.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

‘The flash PMI survey data for May signalled a further expansion of UK business activity, suggesting the economy continues to recover from the mild recession seen late last year.

The survey also brings welcome news of a cooling in service sector inflation, which is needed to open the door for the Bank of England to start cutting interest rates.’

Speculations that easing services inflation could prompt the central bank to lean into a more accommodative approach to monetary policy may serve to limit GBP’s upside potential as the session progresses.

US dollar (USD) buoyed by hawkish Fed minutes

The US dollar (USD) is rangebound this morning ahead of some fresh releases due out later today, with investors seemingly reluctant to place any aggressive bets on the ‘greenback’ in the interim.

Ahead of this afternoon’s hefty releases, the Federal Reserve’s latest meeting minutes serve to keep USD afloat. Published yesterday evening, the minutes unexpectedly stated that various policymakers expressed a willingness to further tighten monetary policy if necessary.

Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance, observed:

‘Higher for longer is the official mantra as the Fed officially acknowledged that inflation is staying more sticky than they would have liked. Although they wanted to cut rates, they are not going to be able to do that in the near future.’

Robust data and hawkish Fed rhetoric in recent weeks has seen the likelihood of a September interest rate cut fall to around 50%, while other investing giants, such as Goldman Sachs CEO David Solomon, aren’t convinced that the Fed will enact any monetary loosening in 2024. Further signs of US economic resilience this afternoon could serve to reinforce speculations of a continually hawkish Fed stance.

Pound US dollar exchange rate forecast: US PMIs in focus

Looking ahead, the latest US PMIs are due for release this afternoon. Both services and manufacturing PMIs are due to hold steady in May at 51.3 and 50, respectively. As such, signs of steady growth in both vital sectors could underpin the ‘greenback’.

Looking to the UK, a lack of further releases throughout the session may leave the increasingly risk-sensitive pound vulnerable to market risk dynamics, with any upbeat trading conditions likely to boost GBP against its safer rivals.

Yasmine Arasteh

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