February 23, 2023

Sterling showing clear signs of recovery, but still a way to go.

The UK Services PMI of 53.3 boosted Sterling, but market prices are affected by interest rate decisions and inflationary pressures, which are influenced by monetary policy makers.

Fundamental data moves the market, but policy decisions control it - stay informed for smarter trading decisions.

When it comes to fundamental data, the Purchasing Managers Index's serve as a good barometer of broad economic health, especially when looking for signs of recovery.

This week, UK Services PMI posted a figure of 53.3 against a forecasted 49.2, the significance being that service industries contribute around 80% of British GDP.  When considering PMI numbers, it is important to understand that a reading above 50 signifies industry expansion, whilst a number below 50 indicates contraction.

This gave Sterling a much needed shot in the arm, having traded back below 1.2000 at the end of last week, with a lot of supporting analysis around the near miss of a UK recession, creating a generally upbeat atmosphere around GBP.

But as we have learnt time and time again, interest rate decisions beget currency fluctuations,  and with mid weak commentary from the FED indicating a return to a more aggressive stance within their own monetary policy, the USD purged all short term gains to GBPUSD and EURUSD.  

The main benefactor was GBPEUR, which gained significantly following the news (circa 110 bps), having been pinned down at the bottom of its own trading range.

FED policy makers argue that further 50 basis point hikes may well be necessary in order to achieve desired inflation objectives, despite previous reports of a slow down in tighter monetary policy.  This is also owing to renewed inflationary pressures around China's reopening and the ongoing War.

The key take away is the impact monetary policy makers have on overall prices action.  Crudely speaking, the fundamental data moves the market, but the commentators always control it.

Key short term fundamental considerations will be the US non-farm payroll figure (tier 1 employment indicator), following February's gargantuan 517k jobs added, also inflation data across the board, as well as the subsequent monetary policy decisions that follow.  Remember, the decisions are more or less foreseeable, it's the  component parts of the decision that the markets really care about.

The policy decisions are more or less foreseeable, it's the component parts of the decision that the markets will really care about.

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