GBP/USD Rate Tests 1.31

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A deflating U.S. Dollar and a strong UK economic survey have combined to propel the Pound to Dollar exchange rate above 1.31.

Pound Sterling reached its highest level in 13 months against the Dollar at 1.3128 after the UK composite PMI rose to 53.4 from July's 52.8, exceeding estimates for 52.9.

S&P Global - compilers of the report - said August PMI data signals another solid expansion of UK private sector output, supported by a robust upturn in new order intakes.

The forward-looking components of these surveys are particularly relevant to foreign exchange, and here, things are looking up for the UK:

"Positive sentiment towards the near-term business outlook was also a factor helping to underpin a gradual acceleration in employment growth. Business activity expectations for the year ahead were relatively upbeat in both the manufacturing and service sectors," said S&P Global.

"GBP/USD is trading at its highest level in over a year and the tone remains bullish given the sustained break above its 200-week moving average," says George Vessey, Lead FX Strategist at Convera.

The data and news that UK public sector workers were looking for significant pay increases will ensure the Bank of England remains cautious when considering future interest rate cuts, which can guarantee the Pound's interest rate advantage over the coming months.

Above: GBP/USD is in an uptrend, trading above its 200-day moving average (top chart). However, the RSI is indicating overbought conditions as it has breached 70 (lower panel).

However, the main driver of Pound-Dollar upside remains the broader retreat in the Dollar as investors ramp up bets for U.S. Federal Reserve rate cuts.

"The US dollar has weakened to its lowest level this year despite the recent scaling back of market expectations on Federal Reserve rate cuts for 2024," says Mark Haefele, Global Wealth Management Chief Investment Officer, UBS AG.

Money markets show investors are now pricing in just over 100 basis points of cuts in 2024, which is providing a tailwind for risk assets like stocks and weighing on 'safe havens' such as the Dollar.

The Dollar fell after minutes from the Federal Reserve's July policy meeting showed members of the FOMC were already willing to cut rates as soon as July. "Some dovish-leaning minutes from the Fed’s July meeting, along with the payrolls revisions, helped to cement expectations that the Fed would cut rates pretty rapidly over the coming months, with over 100bps of cuts priced in by year-end again," says Henry Allen, an analyst at Deutsche Bank.

"The rebound in US equities and fading fears of an imminent recession have shifted investors back into riskier assets, while the rapid unwinding of yen carry trades has also accelerated the US dollar’s decline," says Haefele.

From a strategic perspective, Haefele says he expects temporary bouts of USD strength in the coming weeks. We also note that the Dollar is now screening as oversold on some short-term technical measures, which advocates for a pullback.

"But we believe any jumps in the dollar should be used to fade greenback exposure and move into other G10 currencies," says Haefele.