United Kingdom flash Services PMI unexpectedly declines to 47.9 in May

Sagar Dua FXStreet

The United Kingdom (UK) S&P Global Composite Purchasing Managers' Index (PMI) surprisingly declined in May. The Composite PMI has come in at 48.5;a figure below 50.0 is considered a contraction in the business activity. The overall PMI was expected to expand again, but at a moderate pace to 51.7 from April’s reading of 52.6.

The UK's overall business activity unexpectedly contracted due to a significant weakness in the services sector activity. The Services PMI declined to 47.9, which was estimated to expand at a moderate pace to 51.8 from the previous reading of 52.7. The Manufacturing PMI remains steady at 53.7, while it was estimated to be lower at 53.0.

"The UK economy is facing a perfect storm, as rising political uncertainty adds to the growing impact from the war in the Middle East. Businesses are reporting falling output, surging inflation, supply shortages and job cuts in May," Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said.

Market reaction

There seems to be a negative reaction by the British Pound after the UK flash PMI data release; however, it appears to be majorly driven by a slight recovery in the US Dollar (USD), and not the domestic data. As of writing, GBP/USD trades flat around 1.3435.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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