After a poor showing on the services front since late October last year due to COVID-19 restrictions around the Omicron variant, PMI’s have extended their decline across the board. Both manufacturing and services have come short reflecting the knock-on effect from Omicron and its associated restrictive measures. This being said, a print above 50 keeps both sectors in expansionary territory.
The pound has been grappling with many moving parts of recent including:
- Geopolitical tensions – The Russia-Ukraine spat has left investors erring on the side of caution in terms of risk sentiment leaving a tough road ahead for GBP bulls.
- Partygate – Ethics Chief Sue Gray who has been tasked with the official inquiry into the alleged protocol break by Boris Johnson, is rumored to have received what the media label “extremely damning” evidence according to sources. Another potential headwind for the pound depends on consequent actions by Mr. Johnson.
- BOE interest rate decision – Upcoming UK economic data this week (including today’s PMI) is unlikely to sway market expectations around next week’s rate hike; roughly 87% priced in.
- Brexit – Freight woes post-Brexit have shown trade statistics from major ports decline by 30% however, trade talks between India and the UK may be a shining light for the pound.
- FOMC – The Federal Reserve rates decision later this week stands out on the economic calendar with many analysts expecting a hawkish disappointment should the QE program be concluded, which may dampen rate hike expectations and weaken the U.S. dollar.
*The Goldman Sachs economists led by Jan Hatzius said in a weekend report to clients that they currently expect rates to be increased in March, June, September, and December and for the central bank to announce the start of a balance sheet reduction in July.
But they said inflation pressures mean that the ‘risks are tilted somewhat to the upside of our baseline.’
‘We see a risk that the FOMC will want to take some tightening action at every meeting until that picture changes,’ the Goldman Sachs economists said.
This raises the possibility of a hike or an earlier balance sheet announcement in May and of more than four hikes this year.
The Goldman Sachs economists said if the Fed did decide to be more aggressive, it would likely hike by 25 basis points at consecutive meetings rather than by 50 basis points.
GBP/USD Short (Sell)
Enter at: 1.3358