GBP/USD outlook after the upbeat UK manufacturing and services PMI

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his wife, son,… read more.
on Jun 23, 2020
  • The GBP/USD pair wavered today after Markit and CIPS released upbeat manufacturing and services PMI data.
  • The manufacturing and services PMIs rose to 50.1 and 47.0 respectively.
  • The data came ahead of a speech by Boris Johnson outlining the next phase of reopening.

The British pound is higher today as traders react to the superb manufacturing and services PMI numbers. The pound index, which measures its strength against peers, is up by 1%. The EUR/GBP is up by 0.26% while the GBP/USD is unchanged.

GBP/USD
GBP/USD wavers after upbeat services and manufacturing PMI

GBP/USD reacts to UK PMI data

The UK has been hit significantly by the coronavirus pandemic. The number of infections have jumped to more than 305,000 while the deaths have risen to more than 54,000.

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As a result, the UK economy has been hurt severely. According to the OECD, a club of wealthy nations, the UK economy will be among the worst affected this year. The report expects the economy to contract by more than 10%.

But there is a reason to cheer today. According to Markit and CIPS, manufacturing and services sectors have started to bounce back. The report showed that the manufacturing PMI rose to 50.1 in June, from the previous 40.7. A PMI reading of 50 and above is usually a sign of improving business conditions. The manufacturing index also moved above 50 for the first time in months.

According to Markit, the jump in PMI was driven by a rise in business optimism in June and a sharp rise in business expectations. At the same time, the number was dragged by a sharp decline in new orders.

The GBP/USD also reacted to the upbeat service PMI rose to a four-month high of 47.0. The previous PMI was at 29.0. In the survey, Markit found that financial services was the best-performing sector followed by transport and communication. Still, business closures in the hotel and restaurant business dragged the momentum. In a statement, Chris Williamson said:

“June’s PMI data add to signs that the economy looks likely return to growth in the third quarter, especially given the further planned easing of the lockdown from 4th July. June saw a record rise in the PMI for a second successive month, confirming that the economy is moving closer to stabilising.”

The services PMI is particularly important because the UK is mostly a service-based economy. The sector employs more than 80% of all people.

UK reopening but risks remain

The GBP/USD also reacted to news that Boris Johnson is planning to announce more measures to reopen the economy. In a speech scheduled for later today, he will announce more measures to reopen pubs, restaurants, cinemas, and museums.

In his announcement, he is also expected to address the 2-metre rule that has been criticised by most businesses. They argue that this rule will increase costs and hurt most companies.

At the same time, there is optimism that his government is planning to lower taxes in a bid to encourage consumer spending. Some analysts see the government slashing the VAT to about 17% or 17.5%. This, in turn, will encourage more people to buy expensive items like TVs, cars, and furniture.

Meanwhile, the biggest risk for the UK and the GBP/USD is Brexit. With days to June 30th nearing, there are concerns that the risks of a no-deal Brexit are increasing. That date is important because it is the deadline for requesting an extension.

GBP/USD technical outlook

GBP/USD
GBP/USD technical analysis

The four-hour chart shows that the GBP/USD pair has been in a downward trend after peaking at 1.2805 on June 10. It has also formed a descending channel. The price is now closer to the higher side of the channel. It is also below the 50-period and 100-period moving averages. This means that the price may be under pressure as bulls attempt to move below the 50% retracement at 1.2440.

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