GBP/USD Daily Forecast – Sterling Spikes on PMI Release but Struggles to Hold Gain

Purchasing Managers survey data out of the UK came in stronger than expected with the services sector rising to a 16-month higher while the manufacturing sector reached a nine-month high.

Analyst had been looking for a rebound in both sectors after figures fell short in the prior two readings and it appears, based on the reaction in the exchange rate, the markets were looking for the same.

The last two major data releases have been positive for the UK, putting into question whether the Bank of England will cut rates at their next meeting. The earlier released jobs report showed the employment rate rising to a record high. The increase in wages was in line with recent averages although on an inflation-adjusted basis, showed no reason for concern.

The recent recovery in GBP/USD suggests that market participants may have felt a lack of urgency in lowering interest rates although it will be important to see if policymakers have changed their stance following the last two reports.

Chris Williamson, Chief Business Economist at IHS Markit, commented: “It seems likely that the rise in the PMI kills off the prospect of an imminent rate by the Bank of England.” At the same time, BoE Governor Carney played down the effectiveness of PMI data as a forward-looking indicator for the economy at a recent BoE meeting.

Technical Analysis

GBP/USD turned lower from resistance at 1.3171 shortly after the PMI data which seems to suggest a positive report was already priced in. The markets will now wait to hear from the bank to confirm that a rate cut is not imminent.

This tends to introduce downside risks which are further exacerbated by a strong dollar. The greenback regained upward momentum following Thursday’s ECB meeting and the trade-weighted index (DXY) has since broken to a seven-week high.

The 100 moving average on a 4-hour chart falls at 1.3076 and offers support. There is confluence as the same price point served to hold the pair lower last week. Beyond that, the next level of support comes in at 1.3050.

Bottom Line

• GBP/USD is declining as investors had priced in a strong PMI report from the UK.
• The dollar is regaining upward momentum which stands to weigh on the pair.
• The markets will want further confirmation that the BoE will not cut rates next week in order to keep Sterling bid.