On Thursday morning, the pound rose as market mood improved and investor appetite for risk-sensitive assets such as the pound increased. In terms of monetary policy, BoE Dhingra’s dovish comments on interest rates amid the gloomy UK economic outlook had little effect on the pound. In the meantime, the release of the mixed preliminary S&P Global/CIPS PMI data didn’t weigh on the pound, with the GBP/USD last seen rising.
Upbeat market sentiment
The appeal for risk-sensitive assets has increased after Wednesday’s release of the Federal Open Market Committee (FOMC) minutes for the January monetary policy meeting. The minutes were mostly in line with expectations, which limited the upside potential for the dollar and helped support the pound. GBP marched higher and toward weekly highs in Thursday’s European session as market sentiment improved.
BoE commentary
The GBP/USD pair rose despite the cautious comments by Bank of England (BoE) policymaker Swati Dhingra. Dhingra highlighted the downside risks to the United Kingdom economy due to high interest rates. She warned about the increasing cost of living standards in the United Kingdom due to keeping interest rates at 5.25% for a longer period.
In February’s monetary policy meeting Dhingra voted for a rate cut and warned about a hard landing if the BoE postpones further rate cuts.
BoE policymakers tend to focus on monitoring service inflation and wage growth for any signs regarding the inflation outlook, but Dhingra said that service prices are not a good measure of domestically produced inflation.
In her speech at the Market News International Connect event on Wednesday, Dhingra said the demand outlook is “weak and less resilient” than previously anticipated and that higher mortgage costs and rental prices weighed on households and led to weak Retail Sales.
She explained: “Monetary policy needs to be forward-looking because moderation of the policy stance requires time to implement and to feed through to the real economy.” She added that the outlook for headline inflation was “bumpy but downwards” and that UK consumption remained below pre-pandemic level.
The GBP/USD pair largely ignored her dovish comments and remained strong. Market expectations for BoE rate cuts are slightly higher after BoE Governor Andrew Bailey said the central bank can start cutting interest rates before inflation reaches the 2% target.
Preliminary S&P Global/CIPS PMI data for February
UK Manufacturing PMI rose to 47.1 in February, missing estimates of 47.5, but improving slightly from January’s reading of 47.0. The Services PMI, which represents the service sector, came in at 54.1 as was expected, but lower than the prior reading of 54.3. The pound held its gains despite the mixed UK business PMIs.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “UK economic growth has accelerated in February, with the early PMI survey data pointing to the largest rise in business activity for nine months. This is by no means a one-off improvement, as faster growth has now been recorded for four straight months after a brief spell of decline late last year.”
Williamson clarified that the survey data has calmed fears that last year’s slowdown could have spilled over into 2024, since it showed the economy grew at a quarterly rate of 0.2-3% in the first quarter of 2024. The data is promising and suggests that the “UK’s ‘recession’ is already over.”