UK PMI Out of Recession, Pound Sterling Advances

GBP/USD jumped about 0.5 percent to a four-day high. However, there are still doubts hanging over the pound sterling's rally.

The pound sterling was the only major currency that outperformed the US dollar at the start of the European session on Tuesday (21/February). GBP/USD jumped about 0.5 percent to a four-day high of 1.2114, while EUR/GBP shed about 0.7 percent to around 0.8800. GBP/JPY also topped a record high since December 20. However, doubts remain hanging over the pound sterling's rally fundamentally.

GBP/USD Daily chart via TradingView

S&P Global reported the results of its preliminary February 2023 Purchasing Managers' Index survey for the UK services sector rocketing from 48.7 to 53.3, much better than the estimate pegged at 49.2. A PMI reading below 50 indicates contraction, while a reading above 50 indicates expansion.

The UK Manufacturing PMI score also improved from 47.0 to 49.2, higher than the estimate of only 47.5. The UK PMI score compositely came out of recession territory with an increase from 48.5 to 53.0.

The service sector accounts for around 80% of UK economic activity, so the improvement in this data set significantly impacts analysts' eyes. If the data is accurate and continues to improve, Britain can escape the threat of recession which has been a scourge since last year.

S&P Global said that reduced economic uncertainty, reduced inflation, and reduced supply disruptions had boosted consumer demand and improved business confidence. The increase in consumer demand contributed to increasing orders and employment. Consequently, the UK central bank (BoE) may have to take a more hawkish stance.

"The resilience of the economy and the strong gauge of inflation in this survey raises the likelihood that the BoE will tighten monetary policy further, and possibly in a more aggressive manner," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

Not all experts agree. Pantheon Macroeconomics defended its projection for a decline in UK GDP for this year's first and second quarters. Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, said it was too soon to conclude that the UK economy had emerged from recession with just one PMI over 50.

"PMI is only a crude measure of (economic) activity and is often overly influenced by sentiment. At this point, purchasing managers may be (only) relieved that the economic outlook is not as bad as forecast in the fourth quarter (2022) due to interest rate expectations and wholesale energy prices have fallen since then, while share prices have increased," Tombs said.