By Areena FxThe Pound Sterling (GBP) climbed to near 1.2670 against the US Dollar (USD) during Monday’s session, driven by the release of the UK S&P Global/CIPS PMI data. The composite PMI revealed steady economic growth, rising to 50.5, as robust service sector performance offset a sharper-than-expected contraction in manufacturing activity.
Key UK PMI Insights:
- Manufacturing PMI: Declined further to 47.3 in December (from 48.0 in November), missing the expected 48.1.
- Services PMI: Rose to 51.4, beating both forecasts (51.0) and the previous reading (50.8).
Despite the steady overall growth, businesses expressed concerns about weak consumer confidence, tighter corporate budgets, and reduced non-essential spending. The survey also highlighted a third consecutive month of declining employment levels, with firms cutting hours and restructuring due to upcoming increases in National Insurance contributions.
A separate survey by the UK Recruitment and Employment Confederation (REC) noted dissatisfaction among employers regarding the NI contribution hike from 13.8% to 15%.
US PMI and Broader Market Dynamics
Investors are also closely watching the US flash PMI data, expected later today, which may reveal slower growth in both manufacturing and services sectors. The outcome could offer further insights into how demand and inflation are evolving in the US economy.
Market Movers: GBP/USD Remains Strong Amid Policy Speculation
The GBP/USD pair extended its gains above 1.2650, outpacing the US Dollar, which remained relatively subdued. This week’s focus is on the upcoming monetary policy decisions from the Federal Reserve (Fed) and the Bank of England (BoE):
- Federal Reserve: Expected to cut interest rates by 25 basis points to a range of 4.25%-4.50%.
- Bank of England: Likely to keep rates unchanged at 4.75%.
While the rate decisions are largely priced in, the key driver will be the forward guidance for 2025, with markets anticipating three rate cuts from both central banks next year.
UK labor market data (Tuesday) and CPI inflation figures (Wednesday) will also be pivotal in shaping expectations for the BoE’s policy stance on Thursday. Any surprises could lead to increased volatility in GBP/USD trading.
Technical Analysis: GBP/USD Outlook
- GBP/USD rebounded near 1.2645 after a three-day decline.
- The pair remains below all key Exponential Moving Averages (EMAs), maintaining a bearish outlook.
- A rising trendline from October 2023 lows around 1.2035 supports GBP/USD near 1.2600.
- Resistance: December 6 high at 1.2810.
- Support: Psychological level at 1.2500.
- The 14-day Relative Strength Index (RSI) hovers near 40.00; a dip below this could signal further bearish momentum.
FAQs: Bank of England and the Pound Sterling
- What does the Bank of England do, and how does it impact the Pound?
The Bank of England (BoE) controls UK monetary policy, aiming to maintain a 2% inflation target. By adjusting interest rates, it influences borrowing costs, credit availability, and the Pound’s value. - How does BoE policy influence the Pound Sterling?
- Rate Hikes: Tighter monetary policy strengthens the Pound, as higher rates attract global investors.
- Rate Cuts: Lower rates weaken the Pound, making UK investments less attractive.
- What is Quantitative Easing (QE) and its effect on the Pound?
QE involves the BoE injecting money into the economy by buying bonds to stimulate growth. While it boosts liquidity, QE typically weakens the Pound. - What is Quantitative Tightening (QT) and its effect on the Pound?
QT is the reverse of QE, where the BoE reduces its bond holdings as the economy strengthens. This policy generally supports the Pound by reducing excess liquidity and signaling tighter financial conditions.