The pound is gaining momentum, and there are at least two reasons for this. The first reason is that after shrinking for two quarters in a row, economic growth has resumed, PMI indices are in expansion territory, and there are good chances that it will continue to rise. This reduces the burden on the Bank of England and could potentially adjust rate cuts plans for in favor of a more gradual trajectory.
The pace of the UK economic recovery is high, with production levels growing at the fastest rate since early 2022. There is simultaneous growth in production and new orders. Business optimism is rising, but costs are also increasing – inflation in the manufacturing sector has been rising for the fifth consecutive month and has reached its highest level in a year. If costs continue to rise, the BoE will face the threat of another round of inflation growth, making any rate cuts unlikely.
The net volume of consumer lending in April was significantly higher than forecasted, further indicating a shift in consumer sentiment. Consumers are ready to spend more as they feel more confident about their incomes, which is a sign of a pickup in GDP growth in Q2.
The second reason is the accelerated slowdown of the US economy, which might force the Federal Reserve to start lowering rates earlier. The dollar sharply declined across the board on Monday following the release of the ISM manufacturing index. Instead of the expected recovery from 49.2 to 49.6, it fell to 48.7 in May, which the markets interpreted as another sign of an emerging recession. Now, the market is focused on the ISM services index on Wednesday. The forecasts are positive (from 49.4 to 50.5), but if this gauge also falls short of expectations, the dollar could lose even more than it did on Monday, as forecasts for the first Fed rate cut might shift from September to July.
The net long EUR position increased by 1.94 billion, (the second weekly result after the euro) to 2 billion, with growth observed for the fifth consecutive week. Positioning has shifted from neutral to bullish. The price is above the long-term average and is firmly rising.
The pound reached the target set the previous week. It has not yet managed to consolidate above this level, but everything suggests that the next attempt will be successful. A deep correction is unlikely; we expect growth to resume after a brief consolidation, with the target being the local high of 1.2892, followed by 1.2980/3000. Increasing signs of overbought conditions could hinder growth, but these signs are not yet too evident.
