GBP/USD Remains Supported After the UK Data

The volatility in the USD to GBP rate has slowed, but the recent price action in GBP/USD indicates a potential upside momentum, with the 20 SMA acting as support for this forex pair. GBP/USD experienced a decline in the first week of May but saw a recovery following the release of disappointing soft CPI and Non-Farm Payrolls (NFP) data from the United States. The UK CPI inflation report released yesterday also showed a decline, but it was smaller than expected, which kept the GBP supported, despite some renewed USD buying.

GBP/USD Chart H4 – The 20 SMA Acting As Support

Yesterday the Office for National Statistics (ONS) reported that Consumer Price Index (CPI) inflation fell to 2.3% annually in April, down from 3.2% in March but surpassing market expectations of 2.1%. Meanwhile, core CPI, excluding volatile food and energy costs, rose by 3.9%, exceeding analysts’ forecasts of 3.6%. This news boosted GBP/USD , pushing it to 50 pips up to its highest level since March 21 above 1.2761 during the early European session. Although the pair retraced some of its gains, it remained comfortably above 1.2700 as the Bank of England’s rate statement following its decision was perceived as more hawkish.

The US dollar in the other hand, has faced pressure following last week’s modest US CPI figures, as waning hawkish expectations shifted market focus from inflation to growth. This shift fostered a positive risk sentiment, typically detrimental to the dollar but beneficial to other major currencies. From a risk management perspective, buyers may find a more favorable risk-reward ratio around the 20-day Simple Moving Average (SMA).

• Services PMI 52.9 vs. 54.7 expected and 55.0 prior.
• Manufacturing PMI 51.3 vs. 49.5 expected and 49.1 prior.
• Composite PMI 52.8 vs. 54.0 expected and 54.1 prior.

• Flash UK PMI Composite Output Index at 52.8 (Apr: 54.1). 2-month low.
• Flash UK Services PMI Business Activity Index at 52.9 (Apr: 55.0). 6-month low.
• Flash UK Manufacturing Output Index at 52.7 (Apr: 49.4). 25-month high.
• Flash UK Manufacturing PMI at 51.3 (Apr: 49.1). 22-month high.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“The flash PMI survey data for May signalled a further expansion of UK business activity, suggesting the economy continues to recover from the mild recession seen late last year. The survey data are consistent with GDP rising by around 0.3% in the second quarter, with an encouraging revival of manufacturing accompanied by sustained, but slower, service sector growth.

“The survey also brings welcome news of a cooling in service sector inflation, which is needed to open the door for the Bank of England to start cutting interest rates. A temporary surge in wage-related cost growth seen in April is showing signs of fading in May. Firms are also reporting that strong competition is limiting their scope to raise prices, especially in the face of weakened demand due to the elevated cost of living.

“With companies now reporting the slowest price growth in over three years, and headline inflation falling close to target, the PMI data support the view that the Bank of England will start cutting interest rates in August providing the data continue to move in the right direction over the summer.

“Such speculation of rate cuts has already fed through to improved business confidence, with optimism for the year ahead lifting higher in May, adding to hopes that the battle against inflation can be won without the UK having suffered a serious recession.”