The British Pound (GBP) strengthened against the EUR, USD, and other major currencies following reports of robust growth in the UK economy in January. According to the S&P Global PMI survey, the dominant services sector expanded with a reading of 53.8, surpassing December's 53.4 and exceeding the expected 53.2.
Although the manufacturing PMI remained at 47.3, indicating contraction, it was an improvement from December's 46.2 and above the consensus expectation of 46.7. The composite PMI, offering a more comprehensive view of the economy, registered at 52.5, up from December's 52.1 and surpassing the consensus of 52.2. The Pound to Euro exchange rate reached its highest level in four months at 1.1715, propelled by these better-than-expected figures. Eurozone PMI readings, falling short of expectations and indicative of economic contraction, further supported the Pound's strength. GBP/EUR exchange rate was quoted at 1.2755, a half-percent increase.
The data suggests that the UK economy is solidly in expansionary territory, potentially reducing the need for the Bank of England to implement interest rate cuts. The likelihood of higher UK rates for an extended period supports UK yields and boosts demand for the Pound. S&P Global noted that service sector activity saw its fastest rise since May, despite a decrease in manufacturing production, attributed to the disruptions in the Red Sea. The survey cautions against a premature policy shift by the Bank of England, especially considering reports of increased freight costs.
Concerningly, the survey reveals that private sector firms experienced the sharpest rise in input costs since August 2023. This, coupled with improving demand conditions and higher optimism toward the business outlook, is expected to keep domestic inflationary pressures robust. Resilient demand is anticipated to bolster employment, wages, and inflation. January data indicates a modest increase in private sector employment, ending a four-month period of job shedding. The rise in staffing levels is linked to a rebound in service sector recruitment driven by new project starts and anticipated demand growth. UK businesses exhibit a more positive outlook for growth in the next 12 months, with confidence levels at their highest since May 2023.
