UK PMIs preview: Cementing the BOE rate cut? Five GBP/USD scenarios


  • Economists expect an improvement in Markit's preliminary UK PMIs for January.
  • The data is critical for the Bank of England's upcoming decision.
  • GBP/USD may react in five different ways in reaction to the data.

To cut or not cut – this is still an open question for the Bank of England after Tuesday's jobs report beat expectations with 3.2% annual wage growth. Until that moment, all previous indicators fell short of expectations. The disappointing retail sales, inflation, and growth statistics – joined by dovish words from BOE officials – have convinced markets to price in a rate cut on January 30.

Final forward-looking word

After the positive surprise in salary figures, some are casting doubts. So far, the past week's data referred to 2019 – either November or December. And now, the last word belongs to Markit's forward-looking gauges for the first month of 2020.

The highly regarded survey for the manufacturing sector is projected to show an increase from 47.5 to 48.9 points – below the 50-point threshold separating expansion from contraction. 

The services sector – which is the UK's largest – carries upbeat expectations for an increase from 50 to 51 points. If realized, it would indicate a return to growth in post-elections Britain.

Services sector almost back to growth January 2020 PMIs

The publication of two figures at the same time complicates the picture. Moreover, some investors are looking beyond one rate reduction and into the next one. This opens the door to five different scenarios.

1) Both above 50 – GBP/USD shoots higher

In case both the services sector – and surprisingly enough the manufacturing sector – return to growth, GBP/USD has room to rally. In this rosy scenario, the odds of a rate cut in January and perhaps for the next meeting are off. The BOE may signal that it will wait for the next Monetary Policy Report (MPR) in May.

The chances are low as this is well beyond expectations. 

2) Beat on manufacturing, but below 50 – GBP/USD rises

If the services sector returns to growth and the manufacturing sector comes close, some investors may have second thoughts about an upcoming cut, but it will probably be underway. Nevertheless, the talk in markets may return to seeing this cut like only a "one and done" – without any additional reductions down the road.

In this case, pound/dollar has room to rise. The chances are medium as this case is not very far from previous figures. 

3) As expected – GBP/USD choppy

There is no specific reason to doubt the consensusno recent figure from January or shocking political statement to change investors' minds. In this case, sterling may trade choppily but eventually, remain within its familiar trading ranges.

The probability is high.

4) A miss, but services return to growth – GBP/USD slides

Similar to second scenario, in this scenario, the services sector's score is above 50 and manufacturing below that threshold, but seeing red on economic calendars could send the pound down. It would remove any doubts about the upcoming rate cut, and leave a meaningful chance of seeing another one in the spring.

The probability is medium. 

5) A contraction in both – GBP/USD plunges

The worst-case scenario is that both sectors are in contraction territory – a big disappointment for the hopeful services sector.

GBP/USD would plunge in this case, as some market participants would foresee a cut one cut in January another in March.

The chances are low for such a gloomy outcome.

Conclusion

Markit's PMIs are critical for the BOE's rate decision coming only six days afterward, as traders are confused after a surprising upbeat wage figure. The publication of two figures at once – with one carrying expectations for growth and another for a downturn – adds complexity to the picture. One thing that has higher probabilities is that the pound is set to rock. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

How do emotions affect trade?
Follow up our daily analysts guidance

Subscribe Today!    

Latest Forex Analysis


Latest Forex Analysis

Editors’ Picks

EUR/USD slides under 1.16 as US Retail Sales smash estimates

EUR/USD is trading under 1.16 after US Retail Sales smashed estimates with 0.7% in September. Treasury yields are rising. The risk-on mood continues to underpin the pair, as the ECB policymaker Wunsch dismisses inflation concerns. 

EUR/USD News

GBP/USD retreats below 1.3750 after US data

GBP/USD has pared some of its gains after US Retail Sales beat estimates, with the core group hitting 0.8% last month. Earlier, investors shrugged off dovish comments from two BOE members. 

GBP/USD News

XAU/USD slumps to $1,770 area on upbeat US data, surging US bond yields

Gold started the last day of the week on the back foot and extended its slide to a fresh daily low of $1,770 in the early trading hours of the American session pressured by the dollar's resilience and surging US Treasury bond yields.

Gold News

Crypto bulls on winning streak pushing for more

Bitcoin price favors bulls reaching $60,000 by the end of this week and onwards to new all-time highs by the end of next week. Ethereum price broke a bearish top line and could hit new all-time highs by next week in tandem with Bitcoin. 

Read more

Why is Tesla going up?

Tesla's (TSLA) stock price has finally pushed higher in a series of steady and sure moves. We had nearly given up on our bullish call with Tesla stock as it kept struggling around the $800 level.

Read more

Majors

Cryptocurrencies

Signatures