Sterling Rises as UK’s PMI Strengthens, Supporting BoE’s Stance

Summary

  • The sterling strengthened on Friday following the Purchasing Managers’ Index’s release, supporting the Bank of England’s (BoE) stance on not discussing interest rate cuts.
  • With a rise to 51.7, the S&P Global/CIPS UK Composite PMI, covering both services and manufacturing sectors, achieved its highest in half a year, surpassing November’s final score of 50.7.
  • The PMI for the Eurozone declined, indicating a potential recession in that region.
  • According to the PMI, the business activity gauge in the UK’s services sector rose to 52.7 from 50.9, while the manufacturing sector’s reading fell to 46.4.

The sterling was boosted last Friday when the Purchasing Managers’ Index (PMI) was published. The data presented signs of financial growth, supporting the Bank of England’s (BoE) refusal to discuss lowering borrowing costs.

The S&P Global/CIPS UK Composite PMI, encompassing both the services and manufacturing sectors, increased to 51.7. This improvement denotes the highest reading in half a year, an increase from November’s final grade of 50.7.

Eurozone’s PMI Decline

This robust UK index reading starkly contrasts with the deteriorating PMI reading for the Eurozone in December, suggesting a looming recession for the bloc.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, notes that while the UK economy has avoided a recession, it exhibits signs of a dual-speed economy. Manufacturing has been contracting sharply, yet services have regained some stability.

Financial services activity also received a boost from the 2024 prediction of lower interest rates.

Despite financial markets anticipating rate cuts next year, the BoE maintained borrowing costs and reiterated the necessity of keeping them high to mitigate still-high inflation risks.

PMI Index Insights

The PMI index depicted a rise in the services sector’s business activity gauge to 52.7 from 50.9, marking only the second instance since July that the index surpassed the 50.0 growth threshold. Meanwhile, the manufacturing sector experienced a decrease, with its reading falling to 46.4.

Despite the manufacturing sector’s contraction for the 17th consecutive month, steady growth in new business for services companies counterbalanced the dip in manufacturing orders.

However, staffing levels decreased consecutively for the fourth month. Despite this, the PMI data did provide minor relief to the BoE by demonstrating a slight deceleration in services price inflation.

Overall, the PMI data showed persistent price pressures and a resilient economy, though the growth remains barely noticeable. The data highlighted that the GDP shrunk by 0.3% in October, leaving output flat from the beginning of the year.

With a cautiously positive tone, including strong output expectations for the next three months, the overall UK economy remains mostly stagnant. However, consumer confidence experienced a modest increase in December, and there are indications of a potential upward trend in the housing market.

The PMI data is vital to forex traders, as fluctuations in the PMI values may impact the sterling’s strength. A strengthening sterling indicates a robust economy, which may be beneficial to assets associated with the UK economy.

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