Weak UK PMI Data Sends Pound Lower, BoE Rate Path Unchanged

The pound slipped against the dollar Monday after business surveys showed the UK economy cooling and price pressures easing, reinforcing expectations the Bank of England will hold rates through year-end. GBP/USD traded at 1.3191, down 0.43%. EUR/GBP edged up 0.2% to 0.8430.

The S&P Global UK Composite PMI fell to 52.9 in August from 53.4, missing the 53.1 consensus. Services dipped to 53.7 from 54.1; manufacturing output slipped to 52.5 from 53.8. New order growth slowed to its weakest since February, and employment declined for the first time in six months.

More consequential for the rate outlook, the survey's measure of average prices charged by services firms dropped to its lowest since February 2021. That index is the BoE's preferred gauge of domestic inflation pressure. Its decline suggests the August rate cut did not reignite pricing power.

"The PMI data reinforces the view that the economy is cooling without collapsing, which is exactly the scenario the BoE needs to keep cutting rates," said James Smith, developed markets economist at ING. "The pace will be gradual. We expect the next cut in November, not September."

Markets now price a 25-basis-point BoE cut by November with roughly 70% probability, up from 60% before the release. The next Monetary Policy Committee meeting is Sept. 19, though most economists expect no move until November, when the BoE will have fresh quarterly forecasts.

The dollar's broader strength added to sterling's pressure. The forex market analysis showed the dollar index rising 0.3% as traders trimmed bets on aggressive Federal Reserve easing after stronger-than-expected US durable goods orders.

Sterling's decline was contained relative to other G10 currencies. The euro fell 0.4% against the dollar; the yen dropped 0.6%. That suggests the pound's losses were driven more by dollar strength than by UK-specific weakness.

"The pound is holding up reasonably well given the soft PMI data," said Jane Foley, senior FX strategist at Rabobank. "The market is still pricing a relatively shallow BoE cutting cycle, which keeps the yield advantage on sterling assets intact."

The UK two-year gilt yield fell 4 basis points to 3.92%, reflecting the softer growth and inflation signals. The yield gap over US two-year Treasuries narrowed to 85 basis points from 90 bps last week, still wide enough to support sterling against most peers.

Traders will watch Wednesday's UK consumer credit and mortgage approval data for further clues on household demand. The next major test for the pound comes with the Aug. 14 US CPI report, which will set the near-term direction for dollar pairs including GBP/USD.