Despite retreating from its recent one-week peak above $1.25 yesterday, GBP/USD remains poised to record its most substantial weekly advance in seven weeks. A more balanced tone from Bank of England (BoE) policymakers this week, alongside a string of robust UK economic indicators, notably consumer confidence this morning, have bolstered the pound across the spectrum.

The GfK consumer confidence gauge in the UK surpassed expectations, climbing to -19 in April from -21 in March. Over the past half-year, the composite index has fluctuated between -24 and -19, reflecting sluggish progress amid economic uncertainties. Despite the recent uptick in the UK's unemployment rate to a six-month high, inflation has retreated from nearly 9% to around 3% over the past year, resulting in the UK Misery Index (unemployment + inflation) plummeting to its lowest level since 2021. Given the strong correlation between consumer confidence and the Misery Index, we anticipate a further boost in morale, particularly once the BoE initiates interest rate cuts.

Markets are currently pricing in a mere 40 basis points of rate cuts by the BoE this year, with the initial adjustment anticipated in August. However, we wouldn't be taken aback by a reduction as early as June, possibly totalling 75 basis points for the year, which could cap any GBP appreciation due to unfavorable yield differentials. Nonetheless, absent any intervention from Japanese authorities, GBP/JPY could extend its ascent to new highs not seen since 2015. Following unexpectedly low Japanese inflation figures, the Bank of Japan opted to keep rates unchanged this morning, exerting pressure on the yen across the board.

The USD bounced back after Tuesday's PMI slump, surprising markets with diverging business surveys compared to Europe.  This raised doubts about the idea of US economic superiority, but didn't significantly change the monetary policy outlook. Money markets still anticipate less than two quarter-point rate cuts by the Federal Reserve (Fed) this year, with even a slim possibility of a hike.

While soft data like PMI surveys offer insights into economic trends, they haven't been as influential on markets as hard data, particularly inflation and employment reports.  Therefore, today's US GDP figures, Friday’s PCE inflation report, the upcoming Fed meeting, and jobs data next week will play crucial roles in determining whether the Fed maintains its current policy stance, potentially keeping rates higher for longer and sustaining the dollar's strong performance in 2024.  The USD is expected to continue benefiting from its status as a high-yielding, high-growth, commodity-backed safe haven currency. However, this week's price movements, combined with the overcrowded speculative bets on USD appreciation, raise doubts about the extent of further USD gains, especially with USD/JPY hitting fresh 34-year highs amid growing concerns about Japanese intervention.

Historically, current levels of core, medium, and trimmed inflation momentum have been associated with Fed rate hikes rather than cuts.  Options markets now indicate approximately a one in five chance of a US rate hike within the next 12 months.  If this probability increases or if there's another external shock, such as heightened geopolitical tensions in the Middle East, demand for the dollar will likely remain strong.

GBP maintained its recent gains against the EUR and USD yesterday, buoyed by a survey indicating that British manufacturers are gearing up to increase output in the coming months, driven by growing confidence. GBP/EUR has climbed back above its 200-day moving average support level, although it remains nearly 1% below last week's peak of €1.1735. Meanwhile, following its strongest daily surge of 2024 on Tuesday, GBP/USD is edging closer to $1.25.

The Confederation of British Industry’s (CBI) quarterly Industrial Trends survey revealed that business optimism reached its highest level in almost three years, while sentiment within the manufacturing sector improved significantly, with output expectations hitting a six-month high. However, pressures on prices continued to mount, with the corresponding index reaching its highest level since February 2023. While this data didn't significantly impact the pound, coupled with the positive UK PMI surveys earlier in the week, it suggests a brighter economic outlook for the UK in the long run, which should support the sterling. However, in the short term, a growing disparity in the interest rate outlook between the UK and US could weigh on GBP/USD. Currently, less than two 25 basis point rate cuts are anticipated by both central banks, but there's potential for a more dovish repricing by the Bank of England (BoE), particularly if it acts before the Federal Reserve, a scenario that is becoming increasingly plausible.

Market sentiment has slightly shifted against the prevailing notion of policy divergence that had propelled the USD upwards this year. Despite ample evidence of the US economy outperforming its global counterparts, recent business activity data from S&P Global indicates a slowdown, with US activity expanding at its slowest pace in four months in April.  Consequently, money markets have adjusted their expectations towards the likelihood of two quarter-point rate cuts by the Federal Reserve (Fed) in the current year, leading to declines in US yields and a broad weakening of the US dollar.

The flash composite Purchasing Managers Index (PMI), which monitors both manufacturing and services sectors, fell to 50.9.  While a reading above 50 still signifies expansion in the private sector, it marks the slowest growth since December 2023, suggesting that the US economy may not be as robust as previously believed. Furthermore, the composite measure of orders revealed the first contraction in six months, while employment declined for the first time since June 2020, particularly affecting the services sector.  This softening in the labour market has also dampened price pressures, with both input costs and output charges rising at slower rates.

As the USD continues to recoup losses, traders are eyeing Thursday's US GDP report and Friday's March data on the Fed's preferred inflation gauge, the PCE deflator.  Should these indicators fall below estimates, it's likely to exert further downward pressure on the USD.

According to recent flash PMI data, the UK economy's recovery from recession unexpectedly accelerated at the beginning of the second quarter.  This data preceded relatively hawkish comments on monetary policy from Huw Pill, the chief economist of the Bank of England (BoE).  These developments, coupled with weaker US PMI figures, contributed to the largest daily rise (0.8%) of GBP/USD so far this year and saw GBP/EUR surpass its 200-day moving average above €1.16.

The decline in inflation and subsequent strong rebound in consumer real disposable income are driving growth in the UK.  The UK composite PMI climbed to a robust 54.0 in April, exceeding expectations and marking the strongest expansion in business activity since May 2023. Notably, the UK has consistently outperformed the US every month this year.  The increase was led by a significant upturn in the services index to 54.9 from 53.1, offsetting a downturn in manufacturing to 49.1 from 50.9. Meanwhile, firms reported the slowest rise in prices charged in over three years, yet they also faced the strongest cost pressures in 11 months, particularly from staff wages following the 9.8% minimum wage hike in April. This raises concerns that despite headline inflation nearing the 2% target, the battle against inflation pressures may not be over. Indeed, Mr. Pill highlighted the greater risks of cutting rates too hastily, even as inflation approaches target levels.

Yesterday, GBP/USD dropped to $1.23, marking a fresh 23-week low just below the 100-week moving average.  Despite a solid start to the week for global equities and a decline in oil prices, GBP faced widespread selling pressure.  This came as investors digested the dovish remarks made by Bank of England (BoE) policymaker Dave Ramsden regarding inflation and monetary policy.

Recent increasingly dovish sentiments from BoE decision-makers have led investors to anticipate an earlier BoE rate cut, with the possibility of multiple cuts throughout the year.  Presently, markets are fully pricing in two quarter-point rate reductions and a more than 25% chance of a third cut by the end of the year.  The forecast suggests the first cut could occur in June instead of August.  There's potential for further adjustment in market expectations, particularly if more BoE officials echo this dovish stance, possibly including the BoE's chief economist Huw Pill, who is expected to make remarks today.  Moreover, the UK's headline CPI is now lower than that of the US for the first time in two years, amplifying prospects of an earlier rate cut by the BoE compared to the Federal Reserve . Consequently, UK two-year yields have dropped by 20 basis points since last Wednesday's UK inflation report, while US yields have stabilized at six-month highs around 5%. These factors are exerting considerable downward pressure on the GBP/USD pair.  Market expectations for BoE rate cuts may align more closely with those of the European Central Bank (ECB), further heightening downside risks for GBP/EUR.  The pair reached its lowest level since January yesterday, breaching its key 200-day moving average support.

Todays the primary data release will be the global flash Purchasing Managers Index (PMI) figures by S&P will be unveiled.  Recent manufacturing indicators, especially in the US, have shown positivity. Consequently, investors are keenly observing for indications of improvement in regions beyond the US to potentially moderate the strength of the USD.  Last month saw all three sector UK PMI reporting increased activity for the first time since June 2022, and a continuation of this trend will be crucial in offering support to GBP.

The EUR remains under pressure, hovering near $1.0600, marking its second decline in three days, with investors eagerly awaiting the upcoming release of flash PMIs this morning.  Meanwhile, the European STOXX 50 index gained 0.3%, reflecting a calming of last week's geopolitical tensions, while the yield on the 10-year German Bund stabilized above the 2.5% mark, hitting its highest level since November 27.