- Since yesterday's session, the British pound has been recovering against the euro and US dollar currencies, after data showed the strength of the economic recovery in April, as well as the inflationary pressures facing businesses in the UK.
- According to forex trading platforms, the GBP/USD British Pound to US Dollar price moved towards the 1.2465 resistance level before settling around 1.2430 at the time of writing the analysis, awaiting new motivating factors to avoid further collapse.
According to trading, the pound sterling exchange rate recovered from its lowest level in several weeks in the minutes after the disclosure of the rise in the UK services PMI to 54.9 from 53.1 in April, exceeding expectations of 53.
S&P Global Market Intelligence, the producers of the PMI report, said: "Private sector activity in Britain expanded for the sixth consecutive month in April, as a strong recovery in services sector output helped offset a marginal decline in manufacturing output." S&P Global added, "Output growth was supported by a strong rise in new order volumes and a modest acceleration in hiring, driven in each case by the services economy."
Overall, the pound sterling has been under pressure in recent sessions due to the resurgence of expectations that a number of interest rate cuts will be made by the Bank of England in the coming months. Meanwhile, strong economic data could offset some of the recent weakness if it suggests to markets that the bank may need to proceed with caution when it comes to cutting interest rates. Commenting on the figures, Rob Wood, chief economist at Pantheon Macroeconomics, said: "The PMI suggests that the economy is in rude health."
Indeed, the PMI survey points to a sharp rise in average cost burdens across the private sector, "with the rate of inflation rising sharply since March and the highest since May 2023." For his part, the Bank of England Governor and Deputy Governor said last week that UK inflation is on track to hit the 2.0% target, justifying lower interest rates. However, if inflationary pressures start to build up again, the bank may consider delaying the first interest rate cut until August. These PMI figures suggest that there is justification for caution from the bank, which increasingly suggests that the battle against inflation has been won.
In this regard, Simon Harvey, head of FX analysis at Monex, says: "UK PMIs have just been added to the data set that makes Bailey's recent comments, especially Ramsden's, look out of sync. Long GBP positions look good here."
The report adds that strong inflation in input prices was largely linked to rising employee wages, particularly in the hospitality and leisure sectors. Added, there are many survey respondents noted the pressure on labor costs from an annual increase of nearly 10% in the national living wage and an indirect impact on wage rewards for other employees.
For his part, Chris Williamson, chief business economist at S&P Global Market Intelligence, says that the improving picture of economic recovery is welcome news, but “upward pressure on inflation will increase concerns that a sustainable path for inflation below the target level has not yet been achieved.” George Buckley, economist at Nomura Bank, added: “UK PMIs confirm strong activity, and output prices continue to fall, despite input prices rising sharply. We stand by our view that the Bank of England is likely to cut interest rates only in August.”
Overall, if the market takes this view, it is possible that expectations of interest rate cuts could be slightly reduced from here as June is fully priced in, which could mean that the pound sterling's lows are within reach. But Pantheon Macroeconomics economist Rob Wood says these results won't provide the weight of evidence needed to get the bank off its June cutting track.
In general, the timing of the first interest rate cut by the Bank of England's Monetary Policy Committee has become relatively data-independent from our point of view. In other words, the bar for cutting is low. Missing small data points and signs of continued modest inflation will not derail the MPC. Accordingly, we still expect the MPC to cut rates in June, then again in September and December, and signs of stubborn service sector inflation could limit further cuts thereafter.
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Technical forecasts for the GBP/USD pair today:
According to the performance on the daily chart, the gains in the price of the British pound against the US dollar “GBP/USD” did not exit the currency pair from the general downward trend. A first break may occur over that time period if the currency pair moves towards the resistance levels of 1.2550 and 1.2700, respectively.
Otherwise, the chances of a decline will remain stronger, especially since the Bank of England officials have increased the pressure on the sterling regarding the date of the interest rate cut, which contradicts the US Federal Reserve. This may ensure that the bears control the direction of the currency pair for a period of time. Currently, the opportunity for the sterling dollar to return towards the psychological support of 1.2300 is possible again.
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