Like every other Wednesday, the Pound Sterling (GBP) took a notable drubbing. It touched close to 1.3300 against the US Dollar after jumping to a three-year peak of around 1.3430 as recently as one day before. Investors reacted sharply to the release of disappointing preliminary S&P Global/CIPS Purchasing Managers’ Index (PMI) data for April, which pointed towards a contraction in the UK private economy, raising concerns about the nation’s economic stability.
Early PMI figures point to a sudden collapse of the services sector. The manufacturing index has shrunk to 48.9, below the forecast of 51.3 and down from March’s 52.5 reading. Such contraction is bad news for the GBP, indicating a bearish sentiment. An index reading of under 50 indicates that business activity is shrinking.
Economic Indicators and Market Reactions
The drop in the services PMI is a leading sign of possible economic woes to come. Any number above 50 indicates that the private sector is growing. Figures under this line mean economic contraction, which rattles investor confidence.
The 14-day Relative Strength Index (RSI) has cooled down after moving into overbought territory above 70.00. This change has caused a slight return to equilibrium in the GBP/USD pair following its recent surge. Market analysts are noting that the psychological level of 1.3500 will pose a significant hurdle for the currency pair moving forward.
The US Dollar Index (DXY) pulled back down to close to 99.00. It remains firm at 98.00, a three-year low. The dollar’s natural decline is always pound-dollar positive. The poor PMI data quickly overrode this catalyzing effect, sending the GBP even lower.
Wage Growth and Retail Sales Impact
The PMI data isn’t the only positive news. Continue reading Recent figures show that median pay awards across the UK increased at 3% for the fourth quarter in a row, their slowest rate since December 2021. This deceleration in wage growth underpins expectations for further monetary policy loosening, adding to bearish sentiment towards GBP.
Retail sales data expected to have fallen 0.4% m/m after a 1% m/m increase in February. Such declines would only add to the pressure on the pound as consumers pull back on spending in the face of increasing economic uncertainty.
Looking ahead, investors are especially focused on the S&P Global (formerly IHS Markit) PMI data for April. This data has the potential to show changing trends that may be affecting key economic measures such as Gross Domestic Product (GDP), industrial production, jobs and inflation.
Future Outlook for GBP
To complicate matters, recent economic data is upending the market. Investors should adjust their expectations for GBP performance in the future. The April 3 high just above 1.3200 should provide a key floor for GBP/USD. If the duo can’t maintain its newfound strength above 1.3500, it could be set for more trouble ahead.
Debates over the direction of monetary policy have come to a boil. Analysts think that moderating wage growth would help persuade the Bank of England to move on additional easing. With the UK economy currently navigating a challenging environment both at home and abroad, market participants should continue to be cautious.