Pound Sterling clings to gains on UK’s improved economic outlook, soft US Dollar

• The Pound Sterling capitalizes on risk-on mood and rises to 1.2660.
• UK’s upbeat Manufacturing PMI data and increasing home prices suggest that the recession in the second half of 2023 was shallow.
• The US NFP data will guide the next move in the US Dollar.

The Pound Sterling (GBP) aims to extend its recovery above the one-week high of 1.2660 in Thursday’s London session. The GBP/USD pair exhibits strength as recent economic indicators in the United Kingdom have shown that the economy is on track to return to growth after falling into a technical recession in the second half of 2023. Meanwhile, a weaker US Dollar due to the poor United States Institute of Supply Management (ISM) Services PMI data for March also boosted the Cable.

The UK’s Manufacturing PMI surprisingly expanded in March after contracting for 20 straight months, driven by robust domestic demand. Strong UK factory data propelled business optimism to its highest level since April 2023, with 58% of manufacturers expecting their production level to increase over the coming 12 months. In addition, British house prices rose 1.6% in March, the highest pace since December 2022, suggesting that the real estate sector is holding up despite historically higher interest rates.

In the European session, the latest Bank of England (BoE) Decision Maker Panel (DMP) survey for February showed that most firms see selling prices and wage inflation cooling down over the next year. Selling price expectations decelerated to 4.1% from 4.3%, the lowest reading in more than two years. Wage growth expectations softened to 4.9% on a three-month moving average basis from 5.2% in February.

Daily digest market movers: Pound Sterling extends winning spell for third trading session

• The Pound Sterling turns sideways after advancing to 1.2660 against the US Dollar. The asset is expected to extend the upside as market sentiment is bullish, and a weak United States ISM Services PMI has knocked down the US Dollar. S&P 500 futures have posted significant gains in the Asian session.
• On Wednesday, the US Services PMI surprisingly fell to 51.4 in March from expectations of 52.7 and the former reading of 52.6. The Services PMI gauges business activity in the service sector, which accounts for two-thirds of the US economy. Therefore, the impact of a poor Services PMI was significantly adverse for the US Dollar, dragging the US Dollar Index (DXY) by more than 0.5% to 104.15. The ISM report also showed that new orders and prices paid subindexes fell significantly.
• This week, the major driver for the US Dollar will be the US Nonfarm Payrolls (NFP) report for March, which will be published on Friday. The economic data will significantly impact market expectations about whether the Federal Reserve will start reducing interest rates from the June meeting. The NFP report is expected to show that 200K workers were hired over the month, lower than February’s reading of 275K.
• On the UK front, the Pound Sterling will be guided by market expectations over Bank of England rate cuts and the S&P Global/CIPS Services PMI, which will be published at 08:30 GMT. Investors expect the BoE to kick-start the rate-cut cycle in June as the United Kingdom inflation is slowing consistently. For the whole year, BoE Governor Andrew Bailey said he sees two or three rate cut expectations as “reasonable.”
• The Services PMI is forecasted to have remained unchanged from its preliminary reading of 53.4. An upbeat PMI data would strengthen the UK economic outlook. This week, the final Manufacturing PMI reading for March, released on Tuesday, returned to growth after contracting for 20 straight months.

Technical Analysis: Pound Sterling rises to weekly high near 1.2660

The Pound Sterling rebounds to a one-week high near 1.2660 after discovering buying interest from a six-week low of 1.2540. The GBP/USD pair continues its winning spell for the third trading session on Thursday. Cable bulls respected the 200-day Exponential Moving Average (EMA) at 1.2566. The 20-day EMA near 1.2660 could act as a strong barrier ahead.

On a broader time frame, the horizontal support from December 8 low at 1.2500 would provide further cushion to the Pound Sterling. Meanwhile, the upside is expected to remain limited near an eight-month high of around 1.2900.

The 14-period Relative Strength Index (RSI) rebounds above 40.00 after slipping below it. The event should not be considered a “bullish reversal” until it decisively breaks above 60.00.

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• Source: https://www.fxstreet.com/news/pound-sterling-rises-on-improved-uk-economic-outlook-weaker-us-dollar-202404040750