GBP/USD Analysis and Charts

• UK Manufacturing outlook brightens.
• Sterling effective exchange rate index hits an eight-year high.

The UK manufacturing sector experienced a resurgence in May, with output expanding at the fastest rate in over two years, driven by an influx of new orders. This positive development also bolstered manufacturers' optimism, as their confidence levels soared to the highest point since early 2022, with 63% of companies anticipating an increase in output over the next year. The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers' Index climbed to 51.2 in May, up from 49.1 in April, marking its highest reading since July 2022, though slightly below the initial flash estimate of 51.3.

According to Rob Dobson, director at data provider S&P Intelligence,

‘May saw a solid revival of activity in the UK manufacturing sector, with production levels and new business both rising at the quickest rates since early 2022. The breadth of the recovery was also positive, with concurrent output and new order growth registered for all of the main subindustries (consumer, intermediate, and investment goods) and all company size categories for the first time in over two years.’

Full UK Manufacturing PMI Report

The Sterling effective exchange rate is back at levels last seen in June 2016 before the British Pound fell on the Brexit vote. The effective exchange rate represents a weighted average that gauges a nation's currency value relative to a basket of foreign currencies from its key trading partners. Positive UK economic data has helped to prop up the British Pound this year, while a positive risk sentiment backdrop has also aided GBP.

GBP/USD is now retesting the 1.2700 area after posting a multi-month high of 1.2800 last week. A lot of this move lower is due to USD strength, fuelled by expectations that the Fed will leave interest rates at their current levels for longer. The first 25 basis point rate cut is forecast at the November 7 meeting, although the September 18 meeting remains a live option. Support is seen at 1.2667 and the 38.2% Fibonacci retracement at 1.2628.

GBP/USD Daily Price Chart

IG Retail data shows 37.42% of GBP/USD traders are net-long with the ratio of traders short to long at 1.67 to 1.The number of traders net-long is 4.10% higher than yesterday and 3.01% higher than last week, while the number of traders net-short is 2.49% higher than yesterday and 8.47% lower than last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse lower despite the fact traders remain net-short.

What is your view on the British Pound – bullish or bearish?? You can let us know via the form at the end of this piece or contact the author via Twitter @nickcawley1.

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