Pound higher despite weak PMI data

The British pound is steady on Friday. In the European session, GBP/USD is trading at 1.2986, up 0.07% on the day.

UK PMIs decelerate in October

UK PMI releases on Thursday pointed to weaker activity in October in the manufacturing and services sectors. The Services PMI dropped to 51.8, down from 52.4 in September and hit a 4-month low. Business confidence continues to fall as the economy remains weak and there is concern that the government will deliver tough measures at next week’s Autumn budget. Employment in services fell sharply due to concerns over the economic outlook.

Manufacturing showed expansion, but just barely with a PMI reading of 50.3. This was down from 51.5 in September and the PMI decelerated for a second straight month. New orders declined as global demand remains weak and business sentiment fell to a two-year low due to political uncertainties in the UK and abroad.

Despite the weak PMI data, the pound managed to post gains on Thursday. Still, the pound appears headed to a fourth straight losing week and has declined 2.9% in October, as the US dollar continues to gain ground against the major currencies.

The Bank of England has largely contained inflation with its steep rate hikes, and the markets are waiting for the BoE to cut rates in the new era of low inflation. The BoE trimmed a quarter-point in June but stayed on the sidelines at the past two meetings. Governor Bailey said earlier this week that disinflation had taken place faster than expected but warned that inflation remained “unbalanced’ due to services inflation which was higher than the 2% target.

Services inflation has been stubbornly high and eased to 4.9% in September, but this is much too high for the BoE, which is unlikely to embark on a series of cuts until services inflation shows a significant decline.

GBP/USD Technical

• GBP/USD tested support at 1.2958 earlier. The next support level is 1.2928
• 1.3007 and 1.3037 are the next resistance lines

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