Pound Sterling retreats on downbeat UK PMI data

• The Pound Sterling drops sharply as the preliminary UK S&P Global PMI came in lower than expected.
• Traders expect the BoE to deliver one more interest rate cut this year.
• The US Dollar bounces back on dismal market mood.

The Pound Sterling (GBP) falls sharply on Monday, driven by weaker-than-expected preliminary United Kingdom (UK) S&P Global Purchasing Managers’ Index (PMI) data for September and dismal market sentiment. The British currency underperforms against its major peers, except for the Euro (EUR), which has also been weighed down by the unexpected decline into contraction territory of the Eurozone PMI.

The UK Composite PMI came in at 52.9, down from 53.8 in August, suggesting that economic activity in the UK expanded at a slower pace. The indexes for both the manufacturing and the service sectors declined more than expected.

Still, the impact of the slower growth suggested by the PMI data is expected to remain limited considering comments from Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, who appears to be upbeat on the overall economic outlook.

"A slight cooling of output growth across manufacturing and services in September should not be seen as too concerning, as the survey data are still consistent with the economy growing at a rate approaching 0.3% in the third quarter, which is in line with the Bank of England’s forecast," Williamson said.

Going forward, the Pound Sterling's valuation will be guided by market expectations over the Bank of England (BoE) interest-rate outlook. Traders expect the BoE to cut only once in the remaining two monetary policy meetings this year. The BoE kept its key borrowing rates unchanged at 5% last Thursday, with an 8-1 vote split, after cutting them by 25 basis points (bps) in August.

Daily digest market movers: Pound Sterling weakens against US Dollar

• The Pound Sterling drops to near 1.3250 against the US Dollar (USD) in Monday’s London session after the weaker-than-expected PMI release. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against its major peers, jumps to near 101.20.
• Market expectations for the Federal Reserve (Fed) opting for a 50-bps interest rate cut for the second straight time increase as policymakers continue to remain concerned over the labor market outlook. The CME FedWatch tool shows that the probability of the Fed reducing interest rates by 50 bps to 4.25%-4.50% in November is close to 50%.
• On Friday, comments from Fed Governor Christopher Waller indicated that there will be more rate cuts if labor market conditions worsen.
• Investors will focus on the United States (US) preliminary S&P Global Purchasing Managers’ Index (PMI) data for September, which will be published at 13:45 GMT. Economists estimate the Manufacturing PMI to have increased to 48.5 from 47.9 in August. However, a figure below the 50.0 is considered as contraction. The Services PMI is expected to have declined to 55.2 from 55.7, suggesting a slight growth slowdown.

Technical Analysis: Pound Sterling falls to near 1.3250

The Pound Sterling drops to near 1.3250 against the US Dollar in European trading hours. However, the near-term outlook of the GBP/USD pair remains firm as it holds above the 20-day Exponential Moving Average (EMA) near 1.3150. Earlier, the Cable strengthened after recovering from a corrective move to near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp increase after a breakout on August 21.

The 14-day Relative Strength Index (RSI) falls slightly but remains above 60.00, suggesting an active bullish momentum.

Looking up, the Cable will face resistance near the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support.