GBP/USD drops sharply amidst better than expected readings for manufacturing and services PMI

IHS Markit announced the UK’s flash manufacturing and services purchasing managers’ index (PMI) on Friday that offered new insights into the private sector economy in January. The UK’s Composite Output Index on Friday highlighted business activity to have improved in January for the first in the past five months, much of what was contributed by a significant surge in new work.

UK’s Composite Output Index came out at 52.4 in January that marked a massive increase as compared to December’s 49.3. Printing above 50, it was the first occurrence after August 2019 that the index suggested expansion. The reading was also accentuated as the best in almost 1.5 years.

Insights Into The UK’s Manufacturing PMI

IHS revealed January’s manufacturing PMI in the UK at 49.8. In December, the reading was capped at 47.5 while the analysts’ estimate for January was reported at 48.8. January’s reading on Friday was recorded as the best since April 2019. Keeping marginally under the 50 mark, the index suggested rising business stability in the UK’s manufacturing sector in January.

Optimism in the factory activity was attributed to a slight increase in employment and greater than expected levels of new work while a sharp decline in stocks of purchases continued to weigh on the reading. The drop in manufacturing production, however, lost its pace as compared to December. The decline was reported as the smallest since June 2019 when the current downward cycle began.

Insights Into The UK’s Services PMI

The UK’s services PMI, on the other hand, was noted at 52.9 in January that climbed significantly as compared to December’s reading of 50.0. Friday’s reading was also reported to be the best since September 2018. Following the same optimism in business activity, the index highlighted new work in the services sector to have improved to a 16-month high.

With the UK ready to exit the EU on January 31^st, the fading political and economic uncertainty, as per the analysts, contributed to fueling demand (domestic and global) that helped improve business sentiment across all sectors.

Despite the positive figures, Sterling lost traction in the forex market immediately after the release of data. Cable (GBP/USD) dropped around 100 pips from the daily high of 1.3170 to 1.3085 level following the news. 1.32 level continues to mark a strong resistance for GBP/USD, breaking above which, a strong long-term bullish trend is likely to be established in the currency pair.