On Tuesday, the British Pound climbed against the US dollar, after the Purchasing Managers’ Index (PMI) data in the United Kingdom showed that there had been a slowdown in business activity in accordance with expectations.

PMI data

The month of August saw a drop in the PMI composite flash estimate from 52.1 in July to 50.9, while economists had expected the index to drop to 51.1.

The British currency dropped to a two and a half year low against the US dollar earlier in the session over concerns that the PMI data in Britain would keep the sterling without any solid ground against the greenback.

However, the currency was able to erase the early losses it had made because the data from the euro zone showed that its leading economies saw their business activity slow less than expectations in August.

There was a 0.05% rise in sterling by 0901 GMT against the US dollar to reach $1.1771, after it had touched its lowest value of $1.1718, which had not been seen since March 2020.

There was a marginal decline in the US dollar index, while the euro also came down to a low of two decades over renewed concerns that inflation would stay high in Europe because of an energy shock.

This would mean that the European economy would not be able to escape the arrival of a recession on the continent.

Interest rate relation

Market analysts said that the British Pound was weak and there was a possibility of further declines. In fact, they said that it could go down to as low as 1.15 against the US dollar.

This would happen because of recession concerns in the United Kingdom, despite the fact that the PMI data turned out to be in accordance with expectations.

Analysts further said that the British currency was no longer correlated positively with interest rates because the fears of a recession were weighing down any potential monetary policy tightening.

Earlier this month, the Bank of England (BoE) increased its policy rate to 1.75% and is expected to do the same in the coming month.

There was a 0.1% rise in sterling against the euro to 84.41 pence.

Future movements

Market analysts stated that the euro and the pound would continue to trade in tighter ranges because the economic outlook of the UK and the Eurozone appear to be on a similar rocky path.

In the near term, they expect the currency pair to move within the range of 0.8400 and 0.8500. The latest week saw the net-long positioning on the greenback from speculators rise.

Meanwhile, the euro saw its net shorts go up, as per the latest data. The data from the CFTC shows that while euro net short positions rose in August, those of sterling fell.

The market remains short on sterling, but it is not enough for offsetting the risk of a weakening economy and the political instability that currently exists in Britain.