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In October, the UK’s services PMI improved to 51.1, surpassing the market forecast of 51. The manufacturing PMI also rose to 49.6 from 46.2 in September, outperforming the anticipated 46.6.
Despite this data, the Pound Sterling remained mostly unchanged, with GBP/USD decreasing by 0.05% to 1.3315 at the time reported. Performance of the British Pound varied against other major currencies with GBP notably weaker against the US Dollar.
Currency Performance Overview
The heat map of currency changes shows how the British Pound performed against several currencies. Notably, the GBP showed a decline of 0.08% against the Euro and the US Dollar.
Dhwani Mehta, a senior analyst at FXStreet, compiled this report, offering analysis on the financial markets. Further related content includes topics on gold prices, inflation data impacts, and various currency forecasts.
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The UK economy is showing surprising signs of life, with both manufacturing and services PMI figures for October beating expectations. Manufacturing is nearing expansion territory at 49.6, and services activity has accelerated to 51.1. This suggests the economic slowdown we saw earlier in the year may be bottoming out.
Market Reactions and Opportunities
Despite this positive local data, the Pound has not rallied and is in fact weak against the US Dollar. This tells us the market is almost entirely focused on the upcoming US inflation report. The strength of the dollar is overshadowing positive developments elsewhere, creating a divergence between UK fundamentals and currency performance.
For derivative traders, this creates an environment where implied volatility is likely to increase. The upcoming US CPI data is a major event risk, so buying volatility through options, such as a straddle on GBP/USD, could be a prudent way to trade the expected price move. This strategy profits from a large swing in either direction without needing to predict which way it will go.
We have to remember that the Bank of England’s last meeting in early October was a hawkish hold, with policymakers waiting for clearer signs of economic strength. Today’s PMI numbers, combined with the recent ONS data showing UK inflation fell to 4.1% in September, could be the trigger they need. This increases the probability of a rate hike at the December meeting, which is not yet fully priced in by the interest rate swaps market.
This situation feels much more stable than the chaotic market we experienced during the gilt crisis back in late 2022. The market’s focus is now on monetary policy divergence between the Fed and the BoE, not on UK political risk. Therefore, positioning for a stronger pound should be considered against currencies with a more dovish central bank, like the Japanese Yen or Swiss Franc.
Given that the Pound’s weakness is primarily a US Dollar story, we should consider selling options on EUR/GBP. The improved UK economic outlook contrasts with recent Eurozone data, which showed a further slowdown in German industrial production last month. This relative economic performance could put downward pressure on the EUR/GBP cross in the coming weeks.
