Pound Outperforms US Dollar As Fed Dovish Speculation Increases
The Pound (GBP) strengthened sharply near the key resistance of 1.2700 against the US Dollar (USD) during European trading hours on Monday (24/2). The GBP/USD pair traded strongly as the US Dollar underperformed all other currencies, except the Japanese Yen (JPY), on weak US service sector activity data, which increased bets for an interest rate cut by the Federal Reserve (Fed) in June. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, fell near 106.10, its lowest level in almost 12 weeks.
On Friday, the preliminary report of the S&P Global US Purchasing Managers’ Index (PMI) showed a significant slowdown in business activity in February. The Composite PMI rose at a slower pace to 50.4 from 52.7 in January as activity in the service sector unexpectedly declined. The services PMI contracted to 49.7 from 52.9, falling below the 50-mark for the first time in 25 months. Economists had expected service sector activity to expand slightly faster to 53.0.
Service providers largely attributed the decline in activity and the deterioration in new orders growth to political uncertainty, particularly regarding federal spending cuts and the potential impact of the policy on economic growth and the inflation outlook, according to the S&P Global PMI report.
The probability of the Fed leaving the federal funds rate unchanged in the current range of 4.25%-4.50% is 41.1%, down from nearly 50% before the PMI release, according to the CME FedWatch tool.
In contrast, the manufacturing PMI expanded faster than expected to 51.6 in February from an estimate of 51.5 and the previous reading of 51.2.
The business activity data showed a positive impact of US President Donald Trump's tariff agenda on the country's manufacturing sector. Trump has mentioned in his comments that import tariffs will boost production activity locally, fulfilling his agenda to make "America great again."
This week, investors will be focused on the US Durable Goods Orders and Personal Consumption Expenditures (PCE) Price Index for January, due on Thursday and Friday, respectively.
Source: FXStreet
