British pound dips, PMIs next

The British pound has started the new trading week in negative territory, but has manged to pare most of the losses. In the North American session, GBP/USD is trading at 1.2369, down 0.23%.

Markets eye UK PMIs

It’s a quiet start to the week, with no UK releases and only one minor US event on Monday. Things get busier on Tuesday, with the UK releasing Manufacturing and Services PMIs. Manufacturing PMI has posted five straight readings below 50.0, which points to a prolonged contraction. The January release is expected to fall to 45.0, down from 45.3 in December. Services PMI is expected to remain at 49.9, pointing to a stagnant services sector. Barring a huge surprise, the PMIs will be another indication that the UK economy is in trouble, with the notable exception of the robust labour market.

The weak economy makes the BoE’s job anything but enviable – consumers are cutting back on spending, and the negative trend will become even worse if the BoE continues to raise interest rates. There isn’t really much choice, however, as the BoE has designated inflation as public enemy number one, and with inflation still in double digits, more rate hikes are on the way. Forget about bringing inflation back to the 2% target – step number one is to ensure that inflation has peaked. The road back to low inflation will be a long one, with the BoE projecting that inflation won’t drop to 5% until late this year.

The US dollar has run into headwinds, as last week’s retail sales and producer price reports were weaker than forecast. In addition, the massive layoffs we’re seeing at companies such as Amazon and Google could translate into less inflation, which would raise the possibility of the Fed easing up on the pace or rate hikes. Wall Street is growing more confident that the expected recession will force the Fed to cut rates late in 2023 and the Fed will continue to have its work cut out convincing the market to buy into its ‘longer for higher’ message.

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GBP/USD Technical

• 1.2499 and 1.2601 are providing support
• There is support at 1.2335 and 1.2233

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