GBP/USD managed to recover despite being vulnerable and close to more than a six-week low due to slowing UK inflation and gloomy market mood. The upbeat S&P Global/CIPS UK Manufacturing PMI provided support to the British currency.
Better-than-expected manufacturing PMI
The pound found support near a six-week low in Tuesday’s London session after the release of positive S&P Global/CIPS UK Manufacturing PMI for March. The United Kingdom’s Manufacturing PMI returned to expansion and came in above the 50.0 threshold that separates expansion from contraction at 50.3, beating expectations and the previous reading of 49.9.
Rob Dobson, Director at S&P Global Market Intelligence, said: “The end of the first quarter saw UK manufacturing recover from its recent doldrums. Production and new orders returned to growth, albeit only hesitantly, following yearlong downturns, with the main thrust of the expansion coming from stronger domestic demand.”
Inflation
The British Retail Consortium (BRC) announced on Tuesday that the UK’s shop price inflation increased 1.3% in March, which was the slowest since December 2021. This, in turn, is lower than the 2.5% rise observed in February. The drop in shop price inflation was driven by a decline in the prices of food and non-food products. Non-food prices jumped by 0.2% compared to the previous month’s rate of 1.3% while food prices rose by 3.7%, down from 5.0% earlier.
The competition among retailers to provide lower prices has helped to push shop price inflation lower, but rising costs could pose a risk to the task of managing inflationary pressures.
Lower shop price inflation could allow the Bank of England policymakers to lower interest rates again after keeping them at high levels for over two years. As it stands, the market anticipates that the BoE will begin decreasing interest rates from the June meeting.
Weak market sentiment
The appeal of the Cable (GBP/USD) remains limited as market sentiment continues to be weak. Traders have pushed back expectations for the Federal Reserve’s (Fed) first rate cut, which is anticipated in the June meeting. The expectation of higher interest rates for longer than forecast has supported the US dollar and weighed on the pair.
Additionally, the manufacturing sector has recovered and demonstrates a strong economic outlook, which has further reduced the prospects of a June rate cut. The Manufacturing PMI came in above the 50.0 threshold after contracting 16 months in a row. The US factory sector recovered from higher interests which have weighed on activity for the last year and a half.
Robust demand for the US manufacturing sector means that household spending is strong which will give some room to Fed policymakers to delay interest rate cuts. The positive economic outlook will allow the Fed to examine inflation data before any decision to start cutting rates.
The upbeat prospects for the US economy have boosted the US Dollar Index (DXY) which printed a fresh four-month high.
Looking ahead
Traders and market participants will remain cautious ahead of the release of the Nonfarm Payrolls (NFP) data for March due out on Friday. Before that, US JOLTS Job Openings data for February, will also be watched and will provide fresh impetus for the GBP/USD.