Pound Sterling strengthens as traders anticipate a slower Bank of England monetary easing cycle

The Pound Sterling (GBP) strengthens against its peers as investors anticipate a moderate policy-easing cycle from the Bank of England (BoE) this year. Robust UK Retail Sales, hotter-than-expected January Consumer Price Index (CPI) data, and strong wage growth in the three months ending December have led traders to scale back dovish bets on the BoE.

Market expectations indicate that the BoE will implement two more rate cuts this year, following its recent decision to lower borrowing costs by 25 basis points (bps) to 4.5% earlier this month.

However, analysts at TD Securities diverge from this view, predicting four additional rate cuts in 2024 due to uncertainties surrounding potential tariffs under a second Trump presidency. The firm has also pushed back its forecast for the next rate cut to May from March, citing stronger-than-expected UK economic data.

Looking ahead, speeches from BoE policymakers will play a key role in shaping sentiment around the British currency. On Monday, remarks from Clare Lombardelli, Swati Dhingra, and Deputy Governor Dave Ramsden could offer new insights into the central bank’s policy stance.

Meanwhile, flash S&P Global/CIPS PMI data for February aligned with expectations, showing the Composite PMI edged down slightly to 50.5 from January’s 50.6. While manufacturing activity contracted and services expanded, both sectors moved at a faster-than-anticipated pace.

Daily Market Movers: Pound Sterling Retreats as Investors Digest Weak US Services PMI

• The Pound Sterling trims some of its intraday gains after encountering resistance near 1.2700 against the US Dollar (USD) during Monday’s European trading session. GBP/USD pulls back as the US Dollar rebounds, with the US Dollar Index (DXY) recovering to approximately 106.50 after earlier dipping to a 12-week low of 106.10.

• The US Dollar initially weakened due to disappointing US services sector activity data, fueling expectations of a Federal Reserve (Fed) interest rate cut in June. The DXY fell to its lowest level in nearly 12 weeks at 106.10 before rebounding.

• On Friday, the preliminary S&P Global Purchasing Managers Index (PMI) report indicated a notable slowdown in US business activity for February. The Composite PMI eased to 50.4 from 52.7 in January, primarily due to a surprising contraction in the services sector. The Services PMI declined sharply to 49.7 from 52.9, slipping below the 50 threshold for the first time in 25 months. Economists had expected a slight expansion to 53.0.

• The S&P Global PMI report attributed the downturn in services activity and weakening new orders to political uncertainty, particularly concerns over federal spending cuts and their potential impact on economic growth and inflation.

• According to the CME FedWatch tool, the probability of the Fed maintaining interest rates at the current 4.25%-4.50% range has dropped to 41.1%, down from nearly 50% before the PMI release.

• In contrast, the Manufacturing PMI showed resilience, rising to 51.6 in February from the previous reading of 51.2, surpassing the expected 51.5.

• Business activity data suggests that US President Donald Trump’s tariff policies are positively influencing the manufacturing sector. Trump has previously stated that imposing tariffs on imports would strengthen domestic production, aligning with his "America First" economic strategy.

• Looking ahead, investors will turn their attention to US economic data releases later this week, including Durable Goods Orders on Thursday and the Personal Consumption Expenditures (PCE) Price Index on Friday.