In the European session on Monday, the Pound Sterling (GBP) staged a recovery, driven by positive developments in the UK’s S&P Global/CIPS Services PMI for January. The economic data surpassed expectations, registering a reading of 54.3, compared to the anticipated 53.8 and the previous figure of 53.4. According to the agency, a robust influx of fresh orders, strong hiring over the past six months, and increasing prospects of rate cuts by the Bank of England (BoE) contributed to the significant uptick in the Services PMI.
The Pound’s recovery is supported by favorable domestic factors, but the near-term outlook for risk-sensitive assets remains bearish. The appeal of safe-haven assets is on the rise, with investors perceiving the Federal Reserve (Fed) as cautious in rushing to implement interest rate cuts. The diminished risk of a recession in the United States, attributed to robust labor and retail demand, provides the Fed policymakers ample time for rate-cut decisions.
Despite tentative support for the Pound Sterling near 1.2520 in the late Asian session on Tuesday, the broader sentiment remains subdued amid a cautious market mood. The outlook for risk-associated assets is pessimistic, as hopes of aggressive rate cuts by the Federal Reserve have dwindled due to resilient economic growth in the United States.
According to the CME Fedwatch tool, investors now anticipate a rate cut of 25 basis points in May, shifting from previous expectations of March. The positive performance of the US economy, marked by improved order books in the factory and IT sector, positive labor market conditions, and robust consumer spending, contributes to this sentiment.
Minneapolis Federal Reserve Bank President Neel Kashkari’s statement on Monday highlighted that lower risks to economic growth provide the central bank with more time to deliberate on rate cuts. However, the Pound Sterling faces its own set of risks, with concerns about a technical recession that could prompt Bank of England policymakers to adopt a dovish interest rate stance. The UK’s economy contracted by 0.1% in the third quarter of 2023, raising the likelihood of a technical recession.
Adding to the challenges, BoE Chief Economist Huw Pill’s slightly dovish guidance on interest rates has tempered enthusiasm for the Pound Sterling. Pill stated on Monday that the stance has shifted from “if” it is appropriate to cut interest rates to “when.” BoE Governor Andrew Bailey, in the latest monetary policy statement, mentioned that inflation is moving in the right direction while keeping borrowing costs “under review.”
With a light economic calendar, market participants are set to focus on BoE member Catherine Mann’s speech scheduled for Thursday. Mann, one of two out of nine Monetary Policy Committee (MPC) members who voted for a rate hike of 25 basis points, is expected to provide insights into the central bank’s stance amidst evolving economic conditions.