GBP/USD surges to near 1.2760 on the upbeat UK PMI data, focus shifts to US PMI

• GBP/USD advances as UK PMI data beats the market expectations in January.
• UK Services and Manufacturing PMI improved to 53.8 and 47.3, respectively in January.
• US bond yields decline on expectation of Fed’s rate cuts in May, undermines the US Dollar.

GBP/USD rises to near 1.2760 during the European session on Wednesday. The positive Purchasing Managers Index (PMI) data from the United Kingdom (UK) contribute to a rise in the Pound Sterling (GBP) against the US Dollar (USD). The preliminary S&P Global/CIPS Services PMI for January demonstrated growth, reaching 53.8 compared to the previous figure of 53.4. Additionally, the Manufacturing PMI increased to 47.3 from the earlier reading of 46.2. Concurrently, the Composite PMI showed appreciation, reporting a figure of 52.5 as compared to the previous reading of 52.1.

These upbeat Purchasing Managers Index (PMI) figures indicate that the Bank of England (BoE) may refrain from implementing monetary policy loosening measures in the upcoming February meeting. However, market participants are expected to remain cautious and await additional economic indicators to provide momentum leading up to the May meeting. There is speculation that the Bank of England might consider initiating rate cuts as early as May, with the possibility of three more cuts throughout 2024.

The US Dollar faces a challenge due to the downward movement in the bond market, driven by market expectations that the Federal Reserve (Fed) might commence rate cuts in May. There is full pricing in of a 25 basis point (bps) cut in interest rates for May, reflecting the anticipation of a more accommodative monetary policy.

However, the market is pricing in the possibility of no adjustment by the Fed in the upcoming February meeting. This suggests a cautious stance among market participants as they await further signals from the central bank. Looking forward, market participants are expected to keenly observe the release of the S&P Global Purchasing Managers Index (PMI) data from the United States (US) scheduled for Wednesday.