Sterling Faces Mixed Fortunes as Markets Weigh Economic Signals
The pound started the week on a firmer footing against major global currencies, buoyed by fresh PMI data indicating the fastest expansion in UK business activity in six months—an encouraging sign of economic momentum in early 2025. However, its gains were quickly reversed as stronger-than-expected US PMI figures shifted market sentiment, dragging GBP/USD lower. The pair remains stuck within a tight range, with $1.30 acting as an upper barrier and $1.28 providing support. Against the euro, sterling has slipped 1.4% this month but continues to trade two cents above its two-year average of €1.17.
A surge in financial and consumer services demand propelled the UK’s services sector to its strongest growth since August, surpassing market forecasts. In contrast, manufacturing continues to struggle, with the sector shrinking for a sixth straight month and hitting its lowest reading since late 2023. Nevertheless, with services accounting for 80% of UK economic output, their resilience bodes well for overall growth in the first quarter, following a sluggish second half of 2024.
Meanwhile, expectations of Bank of England (BoE) rate cuts have been dialled back after last week’s slightly hawkish policy stance. With wage pressures and inflation remaining persistent, markets are questioning how much room the BoE has to lower borrowing costs this year. Notably, the latest PMI data revealed a sharp rise in service sector input prices, largely driven by wage inflation and suppliers passing on higher costs.
As a result, money markets now see a 60% likelihood of a 0.25% BoE rate cut in May, with total reductions for the year expected to reach 45 basis points—down from over 60 basis points priced in at the start of the month. This shift is likely to limit gains in short-term government bonds while offering some support to sterling through the yield channel. However, with key inflation data and Wednesday’s Spring Statement on the horizon, fresh volatility could lie ahead for the pound.
US Economy Sends Mixed Signals as Markets Stay Upbeat
The latest economic data from the United States paints a conflicting picture, with manufacturing slipping back into contraction territory as the sector’s PMI dipped below 50. Inflationary pressures in manufacturing have surged to their highest level in nearly two years, largely due to tariffs. Meanwhile, business confidence for the year ahead has dropped to its second-lowest level since October 2022, reflecting growing unease over demand and policy direction under Trump’s administration.
Despite these concerns, investors chose to focus on the positives. The composite PMI surged to 53.5, surpassing expectations, driven by a strong rebound in the services sector. After hitting a 15-month low in February, services activity rebounded to a three-month high, fuelled by stronger customer demand, improved business inflows, and better weather conditions. With this resurgence, fears of an imminent recession appear to be fading.
That said, a disconnect remains between different sets of economic data. While softer indicators, such as sentiment surveys, have underperformed in recent months, more concrete measures—including employment, industrial production, and consumer spending—have held up well. This divergence is adding to uncertainty over the true state of the economy and complicating the Federal Reserve’s next steps. The Fed remains highly data-driven, balancing the risk of cutting rates too soon—potentially reigniting inflation—against the danger of keeping rates elevated for too long, which could hamper growth.
For now, selling pressure on the US dollar is easing, supported by strong PMI data and diminishing fears of a slowdown. Reports also suggest that Trump’s upcoming tariff measures on April 2 may be softer and more targeted than initially feared. However, even if trade tensions and recession risks intensify, the dollar is unlikely to fall out of favour entirely, given its traditional role as a safe-haven currency during periods of heightened market uncertainty.
