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Pound Dips Despite Strong Manufacturing PMI

The British pound has reversed directions on Tuesday. The pair is currently trading at 1.4173, down 0.29% on the day.

On the fundamental front, UK Manufacturing PMI accelerated for a fourth straight month. The PMI surged in May, rising from 60.9 to 65.6. Still, analysts had expected more, as the consensus stood at 66.1. The 50-level separates contraction from expansion. The manufacturing sector has now reeled off 12 consecutive months of expansion.

As Covid infection rates continue to drop, the UK government has been easing health restrictions and economic activity is enjoying a resurgence. As the economy heats up, speculation has been rising as to whether the Bank of England will have to re-evaluate its ultra-accommodative monetary policy. Investors are keeping a close eye on comments from BoE policymakers, and any signals of a tightening in policy are likely to provide a boost to the pound.

This was the case on Thursday, when Gertjan Vlieghe a member of the BoE’s Monetary Policy Committee, stated that he expected the Bank of England to raise rates in the second half of 2022, but did not rule out a rate hike in the first half of next year if the employment market recovered faster than expected. The comments were seized on by investors, and the pound climbed 0.61%, its biggest one-day gain in two weeks.

The BoE is expecting a surge in growth for 2021, with a forecast of 7.25%. If this projection is within expectations, its seems almost a given that the central bank will have to tighten policy in response to a surge in growth. As the economic recovery deepens, the BoE will have to keep a close eye on inflation, in addition to the employment market. In the US, a surge in CPI boosted the dollar, and we can expect a similar reaction from the pound if UK inflation heads higher.

GBP/USD Technical Analysis

  • GBP/USD is facing resistance at 1.4241. Above, there is resistance at 1.4293
  • On the downside, there are support lines at 1.4114 and 1.4039
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