tickmill-analytics Posted January 24 Author Share Posted January 24 Weak UK PMI data points to further Pound weakness Incoming data on the EU economy roughly correspond to the thesis put forward by the market that the bloc will be able to dodge a recession. The PMI index from S&P Global climbed into the positive zone in January, amounting to 50.2 points against the forecast of 49.8 points. Positive MoM dynamics is observed for the first time since June last year. A number of factors contributed positively to activity, from a faster slowdown in inflation and improved supply chains to mild weather that helped the EU avoid an energy crisis. Activity indices in the EU's two largest economies, France and Germany, remained at levels below 50 points, but there was a surprising improvement in the service sector in Germany and in the manufacturing sector in France. The ECB has already raised rates by 2.5% and is expected to make another 50bp hike next week. What happens after is unclear: some Governing Council officials suggest it may be appropriate to slow down the pace of tightening, others continue to insist on the need for significant increases. The hawkish ECB case in 2023 finds its justification mainly in a strong labor market: employment continued to rise in December, supporting high wage growth, which usually generates the lion's share of domestic inflation. Unlike the EU, the situation in the UK is less rosy. The S&P Global PMI index for the British economy dived deeper into the recession zone, to 47.8 points in January against 49 points in December. This means that the rate of deterioration in activity has been accelerating this month: The negative momentum prevailed in the services sector, but manufacturers also reported that output declined in January at the fastest pace since the start of the pandemic. The pound fell by 0.6% after release of the index for January, market participants are beginning to price in the idea that the BoE will be forced to bring forward the point of time when it completes the tightening cycle. Traders are looking for another 50 bp hike, according to the current valuation in February and by 25 bp in March. Additional pressure on the pound was also exerted by the publication of data on the UK budget deficit. It swelled by £27.4bn from a forecast of £17.3bn, an outcome that calls into question fiscal stimulus hopes, raising the risk of a UK recession in 2023. From a technical point of view, GBPUSD has broken through the lower limit of the short-term range of 1.231 - 1.23, and now the next sellers' target is likely to be 1.2250. In the event that the price encounters weak resistance, there will be no potential bounce to 1.23 (which will already be a resistance zone) and the price will continue to move towards the main support at 1.22, as shown in the chart below: Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company. High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Quote Link to comment Share on other sites More sharing options...
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