Yesterday's UK PMIs surpassed expectations, indicating that the technical recession in the UK may be over. The private sector saw its output expand for the fourth consecutive month, marking the fastest growth since May 2023. This positive trend is primarily attributed to a robust service sector, outperforming the Eurozone. Despite this, the GBP/EUR remains below €1.17, while the GBP/USD remains above $1.26, experiencing a significant reversal from a three-week high above $1.27. The currency pair appears poised for its most successful week in 2024.
While the headline PMI figures in the UK were stronger than anticipated, the focus for the Bank of England (BoE) remains on inflation. The accompanying PMI data warns that price pressures in the service sector remain elevated, potentially delaying any BoE rate cuts. Although services inflation and wage growth are expected to decrease by summer, short-term stability is anticipated, supporting the pound through favourable yield spreads. Currently, money markets predict just over 60 basis points of BoE rate cuts this year, a decrease from 75 basis points the previous week. UK 2-year yields have risen over 60 basis points since the beginning of the year, and the pound has appreciated against 60% of its 57 global peers month-to-date, up from 40% at the start of February.
Despite a dip in consumer sentiment in February, with households expressing a more pessimistic view of their financial situations and the economic outlook, the pound remains steady. GBP/USD seems to have found reliable support at its 50-week moving average, hinting at another upward movement within its two-month range. The next potential barrier is the 50-day moving average at $1.2675, followed by the 200-week moving average at $1.2850.
In addition to the preliminary Eurozone PMI data for February, the minutes from the European Central Bank's (ECB) policy meeting were disclosed yesterday, affirming the likelihood of future rate cuts, albeit not anticipated by Spring. The ECB aims to assess final first-quarter data on inflation, output, and wages before considering any decisive actions. Following a climb to a three-week peak, EUR/USD retreated, falling towards $1.08 and slipping below its 50-week moving average.
