The British Pound gained ground following August PMI data that exceeded expectations, although certain details in the report may be tempering further gains.
GBP/EUR climbed from 1.15440 to 1.1554 shortly after news indicated that the UK’s private sector likely saw solid expansion in August, partially reversing the previous day’s losses.
The S&P Global Composite PMI for August increased to 53 from 51.5 in June, surpassing the consensus forecast of 51.6, Pound Sterling Live reports.
GBP/USD climbed to 1.3460 from 1.3454 ahead of the data release.
The expansion was led by the services sector, with the Services PMI rising to 53.6 from 51.8. Meanwhile, the Manufacturing PMI remained in contraction territory at 47.3, down from 48 in June.
Despite comfortably surpassing expectations, the Pound’s gains appear relatively muted compared to past reactions to similar surprises.
This mirrors the subdued response after Wednesday’s unexpected rise in UK inflation, which has reduced analysts’ expectations of a November interest rate cut by the Bank of England.
The S&P Global survey showed that new business volumes grew at their fastest rate since October 2024, signalling robust future growth.
However, the muted movement in Sterling likely reflects the report’s weak employment data, with total workforce numbers falling for the 11th consecutive month at a notable pace.
Financial markets may be overlooking the current inflation rise and the recent boost in private sector activity, focusing instead on signs of a slowing labour market that suggest weakness ahead.
Market pricing indicates that investors are now scaling back expectations for rate cuts for the rest of 2025, while anticipating more cuts in 2026. In other words, the labour market decline highlighted by today’s PMIs points to a pattern of delayed, or backloaded, rate reductions.
This is creating downward pressure on the Pound.
“Input cost inflation meanwhile edged up to its highest since May. Survey respondents continued to note that suppliers had sought to pass on increased National Insurance costs,” the August PMI report states.
Furthermore, rising payroll costs contributed to another strong increase in prices set by private sector firms in August, with service providers facing especially pronounced inflationary pressures, according to S&P Global. On Wednesday, the ONS reported that services sector inflation jumped to 5.0% in July, reinforcing market expectations that the Bank of England may postpone further rate cuts.
“Payroll numbers also continue to be cut at an aggressive rate by historical standards as firms cite weak order books and concerns over rising staff costs due to the policies announced in the autumn Budget, which also contributed to persistent inflation pressures,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
Whereas Matthew Ryan, Head of Market Strategy at Ebury commented: “We are very sceptical that this solid performance will last. A hotter than usual summer is likely to be buoying the services sector, notably helping to prop up retail, tourism and hospitality activity. This will likely prove to be no more than a temporary sugar rush, however, rather than a sustained boom.”