BoE’s Cautious Approach Boosts Pound, US Data Disappoints

The Pound Sterling (GBP) has advanced against other currencies as investors anticipate a more measured approach to monetary easing from the Bank of England (BoE). Strong UK retail sales, higher-than-expected January inflation (CPI) data, and robust wage growth in the three months to December have led traders to reduce their expectations of aggressive BoE rate cuts.

Money markets now predict two more BoE rate cuts this year, following the 25 basis point (bps) reduction to 4.5% earlier this month. While TD Securities analysts foresee four more cuts due to potential tariff risks under a second Trump presidency, they’ve pushed their next expected cut to May from March, citing recent positive UK economic data.

Upcoming speeches from BoE policymakers, including Clare Lombardelli, Swati Dhingra, and Deputy Governor Dave Ramsden, will be closely watched for further clues on monetary policy.

Meanwhile, UK economic data has been mixed. The flash S&P Global/CIPS PMI for February met expectations, with the composite PMI slowing slightly to 50.5 from 50.6. Manufacturing contracted while services expanded, both at a faster pace than anticipated.

The Pound Sterling surrendered some intraday gains against the US Dollar (USD) after encountering resistance near 1.2700. The USD rebounded, with the US Dollar Index (DXY) recovering to near 106.50 after falling to a near 12-week low of 106.10.

The earlier USD weakness stemmed from disappointing US services sector data, which increased speculation of a Federal Reserve (Fed) rate cut in June. The US preliminary S&P Global PMI for February revealed a significant slowdown in business activity, with the composite PMI falling to 50.4 from 52.7. The Services PMI unexpectedly contracted to 49.7, its first dip below 50 in 25 months, due to concerns about political uncertainty and potential federal spending cuts. Conversely, the Manufacturing PMI exceeded forecasts, rising to 51.6.

This week, investors will be watching US Durable Goods Orders and the Personal Consumption Expenditures Price Index (PCE) for January, released on Thursday and Friday, respectively.