Manufacturing Contraction Hits Pound

Pound Sterling faces pressure on slowing UK business activity growth

The Pound Sterling (GBP) came under pressure against its peers on Tuesday after the release of weak preliminary United Kingdom (UK) S&P Global Purchasing Managers’ Index (PMI) data for September. The Composite PMI dropped to 51.0 from 53.5 in August, below estimates of 52.7, signaling that overall business activity expanded but at a slower pace.

UK PMI details

• Manufacturing PMI contracted to 46.2, weaker than expectations of 47.0.
• Services PMI fell to 51.9 from 54.2, below the forecast of 53.5.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented: “September’s flash UK PMI survey brought a litany of worrying news including weakening growth, slumping overseas trade, worsening business confidence and further steep job losses.”

Domestic fiscal pressures

The slowdown in UK business activity comes at a time when the Pound is already weighed down by worsening domestic fiscal conditions.

• UK public sector net borrowing surged to £18 billion, the highest in five years.
• Rising Gilt yields are straining the growth outlook, with expectations of higher taxes in the Autumn Budget due in November.

Bank of England policy

The Bank of England (BoE) last week held interest rates steady at 4%, as expected, while maintaining a “gradual and careful” approach to monetary easing. Markets remain uncertain whether the BoE will cut rates again in the remaining policy meetings this year.

Market reaction

• The GBP/USD pair traded near 1.3500, consolidating at the lower end of a rising channel.
• The US Dollar Index (DXY) hovered near 97.30, with investors awaiting Fed Chair Jerome Powell’s speech later in the day.

United States outlook

Markets are now focused on preliminary US PMI data and Powell’s remarks. The Federal Reserve recently cut rates by 25 basis points, the first reduction of 2025, and signaled two more cuts this year.

• Several Federal Open Market Committee (FOMC) members described the move as precautionary to support weakening labor demand.
• Stephen Miran, Fed Governor, argued that interest rates should be reduced by roughly two percentage points, calling current policy overly restrictive.
• Other Fed officials, however, warned that inflation remains well above the 2% target, urging caution on further easing.

Technical analysis: GBP/USD

• Support levels: 1.3470 and 1.3140 (August 1 low).
• Resistance levels: 1.3500 and 1.3800 (July 1 high).
• The 14-day RSI has dropped below 50, with fresh bearish momentum likely if it breaks under 40.

Conclusion

The Pound Sterling remains under pressure as weak PMI data highlights slowing UK business activity, compounded by fiscal challenges and uncertainty over BoE policy. With markets awaiting US PMI data and Powell’s speech, the GBP/USD pair is likely to remain volatile in the near term.