GBP/USD holds above 1.3400 as US PMI strength offsets fiscal worries
- GBP/USD consolidates near 1.3410 on Thursday, retreating from a three-year high as traders assess PMI data and broader macro risks.
- US PMIs beat expectations across services and manufacturing, reinforcing the Fed’s cautious stance on holding rates steady.
- UK Composite PMI improves but remains below 50, with manufacturing still in contraction despite a rebound in services.
The British Pound (GBP) is navigating choppy price action against the US Dollar (USD) on Thursday, holding above the 1.3400 psychological mark to trade near 1.3410 during the American session, as traders digest the latest business activity data from both sides of the Atlantic. The pair shows signs of indecision after retreating from a three-year high of 1.3468 reached on Wednesday.
On the other hand, the US Dollar Index (DXY), which tracks the value of the US Dollar against the six major currencies, is showing a mild recovery from the two-week low, ending its three-day decline to trade just below the 100.00 mark.
In May, the US economy showed stronger momentum, with the S&P Global Flash Composite Purchasing Managers Index (PMI) rising to 52.1 from 50.6 in April, signaling a faster pace of expansion. Manufacturing activity improved notably, with the Manufacturing PMI rising to 52.3 from 50.2, while the Services PMI increased to 52.3 from 50.8. The broad-based improvement indicates resilience in both sectors as the demand remains steady, keeping the Federal Reserve (Fed) on a cautious path and reinforcing the case for holding interest rates steady in the near term.
Conversely, the United Kingdom’s (UK) S&P Global Composite PMI rose to 49.4 from 48.5 in April, indicating a slower pace of contraction in private-sector activity. The services sector returned to expansion territory, with the Services PMI increasing to 50.2 from 49.0, while manufacturing remained in contraction, as the Manufacturing PMI slipped to 45.1 from 45.4. The data offers a mixed view of the UK economy, with strength in services providing some support to the British Pound, but underlying weakness in manufacturing still weighing on the outlook
However, the upbeat business activity data on the US front is tempered by broader concerns over the US fiscal outlook. The House of Representatives passed a controversial tax and spending package expected to widen the federal deficit by nearly $3.8 trillion over the next decade. This follows Moody’s decision last week to downgrade the US credit rating to Aa1, citing rising debt levels and a worsening budget trajectory.
In the UK, UBS forecasts that the Bank of England (BoE) will reduce interest rates to 3.75% by the end of 2025 to address inflation and wage growth pressures. Adding to the complexity, the UK's recent trade agreement with the US has drawn criticism from the European Commission, which accuses the UK of potentially breaching World Trade Organization (WTO) rules. The deal, which includes tariff reductions on certain goods, may strain the UK's post-Brexit relationship with the European Union (EU) and contribute to broader market uncertainty.
Market participants are now turning their attention to upcoming data releases and central bank commentary. The UK's GfK Consumer Confidence index for May is scheduled for release on Friday. Additionally, April's retail sales data will be closely watched for signs of consumer spending trends. In the US, speeches from Federal Reserve officials, including Kansas City Fed President Jeffrey Schmid, are anticipated to shed light on the central bank's policy outlook.
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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