GBP/USD softens to near 1.3500 on weaker UK PMI data
- GBP/USD loses traction to around 1.3510 in Wednesday’s early European session.
- UK S&P Global Composite PMI declined to 51.0 in September, weaker than expected.
- Fed’s Powell signaled central bank to move slowly on interest rate reductions.
The GBP/USD pair loses ground to near 1.3510 during the early European session on Wednesday. The Pound Sterling (GBP) weakens against the US Dollar (USD) on downbeat UK S&P Global Purchasing Managers’ Index (PMI) data for September. The Bank of England (BoE) External Member Megan Greece is set to speak later on Wednesday.
Economic activity in the UK's private sector expanded at a softer pace in September than in August, with the S&P Global Composite PMI declining to 51 from 53.5. This figure came in worse than the estimations of 52.7. Additionally, the Manufacturing PMI eased to 46.2 in September from the previous reading of 47.0, while the Services PMI fell to 51.9 during the same period from 54.2.
"September’s flash UK PMI survey brought a litany of worrying news, including weakening growth, slumping overseas trade, worsening business confidence and further steep job losses," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
Federal Reserve (Fed) Chair Jerome Powell said on Tuesday that the US policymakers continue to deal with the double whammy of potentially higher inflation and a slowing labor market, calling it a “challenging situation.” Powell stated that the interest rates are in a good place to deal with either threat, suggesting he sees no urgency to lower rates aggressively. Cautious remarks from Fed’s Powell could lift the USD in the near term.
Looking ahead, traders will keep an eye on the US Personal Consumption Expenditures (PCE) Price Index for August data later on Friday. In case of softer-than-expected inflation, this might exert some selling pressure on the USD.
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, also known as ‘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.
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