British Pound retreats from two-week highs despite upbeat UK manufacturing activity

GBP/USD tests support at previous highs around 1.3430 after being capped just below 1.3450.
UK S&P Global Manufacturing PMI confirmed that the sector grew at its fastest pace in the last five months in October.
The US Dollar remains moderately offered with all eyes on the US midterm elections.

The British Pound (GBP) holds moderate gains against the US Dollar (USD) on Monday but has eased from the two-week highs hit earlier in the day, despite the confirmation of solid UK manufacturing activity in October. The GBP/USD is testing support at previous highs in the 1.3420 area as of writing, down from session highs a few pips shy of 1.3450.

TMGM tahlili: Moliyaviy bozor yangiliklari, iqtisodiy kalendar va bozor tahlillari

Earlier in the day, the UK final S&P Manufacturing Purchasing Managers' Index (PMI) confirmed preliminary data showing that the sector’s activity grew at a 52.8 pace in October, its strongest reading in five months, from 51.9 in September.

These figures endorse hopes that the Bank of England will hike its Bank rate by a quarter-point, to 4.0% after its monetary policy meeting on Thursday. The question, though, is what comes next, as the bank’s committee is split on further monetary policy tightening and Governor Bailey has shown a tendency to play down inflation pressures in previous months.

US mid-term election risks seen as a modest headwind for Dollar

Elsewhere, the US Dollar is coming up from session lows, although it remains moderately offered on Monday, with lower Oil prices triggering a mild risk-on mood, while uncertainty about the outcome of US elections poses a significant headwind.

Analysts at MUFG/BTMU note that the latest odds from Polymarket show “high expectations that the Republicans will lose control of Congress, and the Democrats could even take both the House and Senate.” MUFG/BTMU experts also add that “losing control of the House and Senate would effectively leave President Trump as a lame duck,” and that a “damaging defeat for the Republicans could put a dampener on US Dollar strength,” although “we don’t expect it to be a game changer on its own.”

Before that, the US ISM Manufacturing PMI, due later on Monday, is expected to show that business activity accelerated moderately in October, with the prices subindex moderating at high levels. These figures strengthen the case for strong US economic growth and are likely to put a floor on the US Dollar's weakness.

Economic Indicator

S&P Global Manufacturing PMI

The Manufacturing Purchasing Managers Index (PMI), released on a monthly basis by S&P Global, is a leading indicator gauging business activity in the UK’s manufacturing sector. The data is derived from surveys of senior executives at private-sector companies. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. The index varies between 0 and 100, with levels of 50.0 signaling no change over the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the Pound Sterling (GBP). Meanwhile, a reading below 50 signals that activity among goods producers is generally declining, which is seen as bearish for GBP.

Economic Indicator

ISM Manufacturing PMI

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The indicator is obtained from a survey of manufacturing supply executives based on information they have collected within their respective organizations. Survey responses reflect the change, if any, in the current month compared to the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that factory activity is generally declining, which is seen as bearish for USD.

Why it matters to traders?

The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) provides a reliable outlook on the state of the US manufacturing sector. A reading above 50 suggests that the business activity expanded during the survey period and vice versa. PMIs are considered to be leading indicators and could signal a shift in the economic cycle. Stronger-than-expected prints usually have a positive impact on the USD. In addition to the headline PMI, the Employment Index and the Prices Paid Index numbers are watched closely as they shine a light on the labour market and inflation.

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