Pound Sterling: Key PMI Report Dominates, but the “Easy Gains” against Euro and Dollar Have Already Been Made says Bank of America – Pound Sterling Live

– PMI report to determine GBP’s near-term path
– Below are the PMI numbers to watch
– Bank of America say GBP to struggle in 2020

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The British Pound heads into Friday’s crunch flash PMI data release riding high, with the UK currency notching up gains against all the major currencies over the course of the past month.

Markets will be looking to today’s data to beat expectations if the Pound is to extend its gains and the currency will almost certainly come under pressure if the data misses target.

In fact, owing to the building expectations for a strong reading, evidenced by Sterling’s advance over recent days, we would suggest even a soft beat on expectations could see the currency decline.

This is because Bank of England policy settings are now back in the driver’s seat when it comes to Sterling direction, and unless the PMI data smashes expectations the market will bet that an interest rate cut will be delivered by the policy setters at Threadneedle Street on January 30.

A basic rule in the world of foreign exchange is that currencies tend to retreat when their central bank cuts rates and the result of the PMI will indicate whether or not this is a situation the Pound faces next week.

The big figure to watch when the flash PMIs are released at 09:30 is the Composite PMI, which is forecast to read at 50.5, an improvement on the previous month’s 49.3. The Composite PMI is an amalgamation of the Manufacturing and Services sector PMIs and gives the broadest possible overview of the broader economy.

Should the number beat expectations, then it will signal that the UK economy could indeed be experiencing a post-election bounce in activity as businesses and consumers open the wallets now that chronic political uncertainty has been erased from the outlook.

The Services PMI is forecast to read at 49.4, down from December’s 50.0, and the Manufacturing PMI is forecast to read at 47.6, a shade higher than December’s 47.5.

“If the PMIs fail to show a significant improvement, a 25bp rate cut by the Bank of England on 30 January is likely. This will probably weaken Sterling,” says Georgette Boele, Senior FX Strategist at ABN AMRO. “If the PMI significantly improves then next week the Bank of England will probably not cut rates on 30 January and Sterling should rise.”

The Pound ended 2019 on the back foot and struggled through the mid-January period, but started advancing on data that showed the UK economy to be in a relatively robust position. The CBI report out on Wednesday was responsible for a particularly rapid ascent in the currency as it showed the largest turnaround in business sentiment in the survey’s history.

In response, the odds of a Bank of England interest rate cut, as priced on money markets, fell to 48%, down on the 65% seen ahead of the release and the 70% recorded in the week prior. The Pound fell back as the odds rose, and then went higher as those odds fell, confirming a clear relationship between the two.

“We continue to believe that burden of proof for a higher GBP remains in the ability of the UK economy to rebound over the coming quarters following the general election,” says Kamal Sharma, a FX strategist at Bank of America in a research note. “UK macro data will have to deliver and so far the evidence is grim. The post general election bounce in data has not yet been in evidence and GBP is entering into two months where seasonal factors have typically worked against the Pound.”

“To us, the easy gains in GBP have been made,” adds Sharma.

The analyst adds there remains a need for UK data “to drive the next iteration in the Sterling move”.

With regards to expectations for a post-election bounce in UK economic activity, BofA economists say they been expecting a Bank of rate cut for some time on deteriorating UK fundamentals.

Already this year we have heard from Bank of England Governor Mark Carney and Monetary Policy Committee Members Gertjan Vlieghe, Silvana Tenreyro and Michael Saunders that unless data materially improves quickly, they will be inclined to vote for an interest rate cut.

“The shift in Bank of England rhetoric since the start of the year has been clear and we think it is only a matter of time before they cut rates – be that January or May. UK housing data has shown signs of improvement in the aftermath of the General election but broader UK data surprises continue to disappoint,” says Sharma.