GBP/USD Pares Losses After Soft PMIs

• UK manufacturing and services PMIs decelerate

The British pound has edged lower. In the North American session, GBP/USD is trading at 1.2720, down 0.09%.

UK PMIs head lower

The UK economy continues to cool down, and today’s PMI readings showed deceleration in both the manufacturing and services sectors. The Manufacturing PMI eased to 42.5 in August, down from 45.3 and below the consensus estimate of 42.5. The Services PMI disappointed and fell into contraction territory, with a reading of 48.7. This was lower than the July reading of 51.5 and missed the estimate of 50.8. GBP/USD fell over 100 basis points earlier but has recovered these losses.

The weak data might not be such bad news as far as the Bank of England is concerned. The battle to curb inflation has not gone all that well, as the UK has the dubious honour of having the highest inflation among G-7 countries. If weakness in the manufacturing and services sectors dampens hiring and weighs on the tight labour markets, inflationary pressures could ease.

The Bank of England meets in September and the markets have fully priced in a rate hike, but it’s unclear what will happen after that, with the markets pricing in one more hike before the end of the year. The BoE’s rate path after September will depend heavily on upcoming inflation and employment reports.

It has been a light week on the data calendar and investors will be hoping for some interesting comments at the Jackson Hole Symposium which begins on Thursday. The Fed and other major central banks are expected to wind up their rate-tightening cycles and Jackson Hole has often served as a venue for announcing shifts in policy.

Fed Chair Powell has insisted that the fight against inflation is not done, with inflation still above the 2% target. There is talk in the markets of the Fed trimming rates next year, but I would be surprised if Powell mentions rate cuts in his speech on Friday.

GBP/USD Daily Chart

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