Pound US Dollar (GBP/USD) Rangebound as UK Service Sector Growth Climbs to 12-Month High

Modified: Thursday, 4 May 2023 12:35 BST - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Rangebound as UK Service Sector Growth Climbs to 12-Month High

Pound US Dollar (GBP/USD) Exchange Rate Trades Narrowly amid Cautious Market Mood

The Pound US Dollar (GBP/USD) exchange rate trended sideways on Thursday. Evidence of strong performance in the UK services sector and Bank of England (BoE) rate hike bets limited the pairing’s downturn.

On the other hand, a retreat in global risk appetite may be capping gains for GBP/USD.

At time of writing the GBP/USD exchange rate was at around $1.2574, which was virtually unchanged from that morning’s opening figures.

Pound (GBP) Treading Water as Service Sector PMI Hits 12-Month High

The Pound (GBP) saw muted movements on Thursday amid relatively sparse trading conditions. However, Sterling found some support from BoE rate hike bets and a surprise upward revision in services sector performance.

Markets continued to price in a 25bps hike from the central bank in May, with some economists even forecasting an additional hike in June.

The final reading of April’s services sector PMI also kept the Pound buoyed on Thursday. The reading was revised higher to 55.9, the sector’s best growth in 12 months. Business signalled stronger consumer spending in the tourism and leisure areas.

Tim Moore, economics director at S&P Global Market Intelligence, said:

‘A strong rate of service sector growth meant that the UK economy started the second quarter of 2023 in positive fashion. Overall private sector output expanded at the fastest pace for one year, despite another fall in manufacturing production during April.’

US Dollar (USD) Edges Higher amid Risk-Off Mood after Cautious Federal Reserve Signals

The US Dollar (USD) was pushed higher by a cautious market mood on Thursday. Signals of a pause in policy tightening from the Federal Reserve capped USD’s gains, however.

The Fed hiked interest rates by 25bps overnight. The decision had largely been priced in by the markets, meaning that the hike had little impact on USD.

It was Fed Chair Jerome Powell’s comments following the decision that weighed on the US Dollar on Thursday. Powell signalled that further interest rate decisions would be driven by incoming inflation data. These cautious signals dampened enthusiasm for USD.

ING economists James Knightley, Padhraic Garvey, Chris Turner had the following analysis of the Fed’s forward path:

‘The recent banking stresses are going to tighten lending standards markedly and that will act as a major brake on economic activity, significantly reducing the need for any further interest rate increases.’

Signs of additional ‘banking stresses’ in the US markets also kept pressure on the US Dollar on Thursday. Shares in Los Angeles-based lender PacWest Bancorp plummeted following the recent sale of First Republic Bank to JPMorgan Chase.

GBP/USD Exchange Rate Forecast: Will Payrolls Slump Pull USD Lower?

The US Dollar could see a boost on Thursday if the latest jobless claims figures print as forecast. Claims for the week ending 29 April are forecast to rise to 240,000 but remain close to previous readings. Markets may take the figures as a signs of continued tightness in the US labour market.

High-impact jobs data on Friday could weigh on USD. A forecast significant drop in April’s Non Farm Payrolls may point to a weaker US economy and reduce confidence in a soft landing for the US economy.

Additionally, an expected uptick in April’s unemployment rate to 3.6% could add to the assessment of a cooler labour market. The data could deepen any losses for the US Dollar.

Renewed fears of a fresh crisis in the US banking sector could also keep pressure on USD this week.

The Pound will see no other data releases over the rest of the week. BoE rate hike bets could lend support to GBP if markets remain convinced of a 25bps May hike.

Domestic headwinds could also inspire movement in Sterling this week. UK citizens are heading to the polls this week to vote in several local elections. Significant losses for the governing Conservative party could prompt fears of fresh political instability in the UK.

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TAGS: Pound Dollar Forecasts