Pound Sterling weakens against US Dollar after flash UK/US PMI data for April

• The Pound Sterling underperforms its peers as the preliminary UK PMI unexpectedly contracted in April.
• Trump is confident of closing bilateral deals with various nations soon.
• Investors await the preliminary US PMI data for April.

The Pound Sterling (GBP) trades lower against the US Dollar (USD) around 1.3280 in Wednesday’s North American session. The GBP/USD pair weakens as the US Dollar (USD) attracts bids despite the release of the weaker-than-expected United States (US) S&P Global Purchasing Managers’ Index (PMI) data for April. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers sharply to near 99.60. During European trading hours, the USD Index gave up initial gains and fell back to near 99.00.

The S&P Global has reported that the Composite PMI dropped to 51.2 from 53.5 in March. This indicates that the overall business activity grew at a moderate pace. Slower-than-expected growth in the service sector activity remained responsible for the weak Composite PMI. The Services PMI, which gauges activities in the services sector that account for two-thirds of the economy, came in lower at 51.4 compared to estimates of 52.8 and the prior release of 54.4. However, the Manufacturing PMI expanded at a faster pace to 50.7. Economists expected the data to have declined to 49.4 from 50.2 in March.

The agency has warned that the announcement of tariff policy by US President Donald Trump is expected to fuel inflation. "Tariffs are meanwhile being cited as the key cause of higher prices, though labor costs are also reportedly continuing to rise, causing companies to hike their selling prices at a pace not seen for over a year. In manufacturing, the rate of price increase is the steepest for nearly two-and-a-half years. These higher prices will inevitably feed through to higher consumer inflation, potentially limiting the scope for the Federal Reserve (Fed) to reduce interest rates at a time when a slowing economy looks in need of a boost," Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said.

Meanwhile, preliminary United Kingdom (UK) S&P Global/CIPS PMI data for April, released during European trading hours came out worse, which has weighed heavily on the British currency. The PMI report has shown that the overall business activity unexpectedly contracted due to a sharp decline in the services sector. A figure below the 50.0 threshold is considered a contraction in business activities. The Composite PMI is down at 48.2 against estimates of 50.4 and the March reading of 51.5, the first decline since October 2023.

The Service PMI contracts to 48.9 from expectations of 51.3 from 52.5 in March. The PMI report has indicated that rising global economic uncertainty and subdued domestic demand conditions were the main factors weighing on output. Meanwhile, the Manufacturing PMI has contracted again at a faster pace to 44.0, as expected, against the former reading of 44.9.

The agency is also pessimistic over business activity expectations considerably in both the manufacturing and service sectors, with overall confidence levels the lowest for two and a half years. According to the report, respondents mostly attributed weaker business sentiment to heightened recession risks at home and abroad. Many firms reported a negative impact on growth projections from US trade tensions, rising geopolitical uncertainty, and general worries about the broader UK business climate.

Daily digest market movers: Pound Sterling underperforms against US Dollar

• Earlier in the day, the US Dollar surrendered initial gains despite optimism over de-escalation in the United States (US)-China trade war and diminishing fears of President Donald Trump sacking Federal Reserve (Fed) Chair Jerome Powell for not lowering interest rates.
• While addressing reporters at the Oval Office on Tuesday, Donald Trump highlighted a “sharp reduction in trade deficits” and “rising revenue” generated from the imposition of tariffs on foreign cars, aluminium, and steel. Trump expressed confidence that his administration is negotiating deals with several countries, which will be effective soon. On the current situation with China, Trump commented that “discussions with Beijing are going well”. The President added that he thinks “they will reach a deal”. Trump further added that tariffs on China would not be as high as “145%, but they wouldn’t be zero”.
• During North American trading hours, the Wall Street Journal (WSJ) reported that one senior White House official said that "tariffs on imports from China were likely to come down to between roughly 50% and 65%".
• Moreover, President Trump pushed back fears of removing Jerome Powell despite criticizing him for not supporting monetary policy expansion. “The press runs away with things. No, I have no intention of firing him. I would like to see him be a little more active in terms of his idea to lower interest rates.”
• In the last few trading sessions, investors were punishing the US Dollar and US assets due to Trump’s assault on the Fed’s independence and ever-changing headlines on trade policies. Market participants started doubting the safe-haven status of the US Dollar. 
• In the UK economy, market participants are confident that the Bank of England (BoE) will reduce interest rates in the May policy meeting. Traders have become increasingly confident about an interest rate reduction next month due to slower-than-expected growth in the Consumer Price Index (CPI) data for March and the uncertainty over the global economic outlook.
• Additionally, slowing UK wage growth is also paving the way for further monetary policy easing. Britain’s human resources data firm Brightmine showed on Tuesday that pay awards rose by 3% for the fourth rolling quarter in a row, which is the slowest increase since December 2021.
• This week, investors will also focus on the UK Retail Sales data for March, which will be released on Friday. The Retail Sales data, a key measure of consumer spending, is estimated to have declined by 0.4% month-on-month after rising by 1% in February. 

Technical Analysis: Pound Sterling retraces to near 1.3300

The Pound Sterling corrects to near 1.3300 against the US Dollar after visiting a three-year high around 1.3430 the previous day. However, the outlook of the pair remains firm as all short-to-long Exponential Moving Averages (EMAs) are sloping higher.

The 14-day Relative Strength Index (RSI) cools down slightly after reaching overbought levels above 70.00. This indicates a mild correction in the pair after a strong rally, but the upside trend is intact.

On the upside, the psychological level of 1.3500 will be a key hurdle for the pair. Looking down, the April 3 high around 1.3200 will act as a major support area.

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