During yesterday's trading there was a slight, albeit visible, rise in the value of the pound against the euro and dollar after a major upgrade to UK PMIs for September was announced. This was suggesting that the UK economy was not performing as poorly as previously thought. Accordingly, the gains of the upward rebound of the GBP/USD currency pair reached the level of 1.2176 before settling around the level of 1.2140 at the time of writing the analysis, awaiting anything new. Losses in the general trend of the currency pair this week affected the support level 1.2037, its lowest in seven months.
According to the announcement, the S&P Global Services PMI for September was upgraded to 49.3, from 47.2 initially estimated and indicates that the British economy avoided a noticeable decline but instead moved sideways from August’s reading of 49.5. The rapid slowdown indicated by the release of the initial estimate was due to the decline in sterling extending over several weeks at that time. Therefore, the upward surprise that occurred on Wednesday can be considered supportive of the currency.
The composite PMI, which adjusts PMIs for services, construction, and manufacturing to give a more accurate snapshot of the broader economy, was revised to 48.5 from 46.8 in the first estimate. The data therefore points to a moderate contraction in the UK economy as readings are still below 50.
But the upgrade is important because the deeper slowdown implied by the initial estimate is suspected to have been the main reason behind the Bank of England's decision to keep interest rates unchanged in September, given that the MPC had seen the report in advance. However, the updated report confirms that the UK labor market is easing in a way that the bank will feel justifies its decision to pause, as companies were noted to be reporting the fastest rate of job losses since January 2021.
Reports indicate that inflationary pressures have reached their lowest levels in approximately two and a half years according to S&P Global, which prepared the Purchasing Managers' Index (PMI) report. The current hypothesis behind expectations of a decline in the pound sterling in the coming months. Is that the UK economy will slow significantly over the coming months. In fact, City Index's Q4 forecasts reflect this topic, which will be widespread among currency watchers.
However, we take note of other survey data on business confidence and consumer confidence that is inconsistent with these challenging expectations. In fact, revisions from S&P Global mean that the Purchasing Managers' Index (PMI) is now more in line with these more optimistic surveys.
The PMI survey noted that “expectations for business activity for next year remained generally optimistic and rose to a three-month high in September.” About 50% of survey respondents expect an increase in activity levels over the next 12 months, while only 14% expect a decrease.
The positive sentiment is driven by hopes for a continued easing of inflationary pressures and a shift in customer demand, as well as new product launches and business investment plans. However, companies remain concerned about the high interest rate environment and burdened household budgets. Inflationary pressures remain high as average prices charged by service sector companies continued to rise at a strong pace in September, largely reflecting efforts to pass on higher operating expenses. A number of companies pointed to fuel surcharges and the impact of higher wage bills. This will be welcomed by the Bank of England, which is betting that services inflation - which it has been particularly concerned about - will fall sharply over the coming months. The results point to a lower inflation environment accompanied by strong activity expectations, which is generally supportive of the pound.
Sterling forecast against the dollar today:
- Despite the recent attempts to rebound higher, the general trend of the GBP/USD currency pair is still bearish.
- The expectation of a move towards the psychological support level of 1.2000 still remains, especially if the US job numbers tomorrow come in stronger than expected and support the path of tightening the US Central Bank’s policy.
- On the other hand, the currency pair may complete the current attempts to bounce back higher and test the resistance 1.2330 if the US job numbers come in less than expectations.
In general, the GBP/USD is still in a selling position, and today the currency pair will interact with the announcement of the British Construction Purchasing Managers’ Index (PMI) reading and then the announcement of the number of weekly American jobless claims.
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