Pound extends with two month high against US Dollar

Daily Currency Update

The Pound gained ground to a two-month high of 1.2569 and then fell back-to-back to slightly within the Asian trading hours on Friday. The gains in the pound were supported by the stronger-than-expected UK S&P Global/CIPS PMI data for November. Markets focus now on the US S&P Global PMI data due for release today.

Yesterday, the preliminary UK S&P Global/CIPS Composite PMI expanded unexpectedly in November with a reading of 50.1 in November from 48.7 in October, better than the expected 48.7. Also, the Manufacturing PMI improved to 46.7 against a 44.8 prior reading, while the Services PMI rose to 50.5 from 49.5 previously. The British Pound surged against the US Dollar as the Bank of England Governor Andrew Bailey suggested interest rates could remain higher for longer than priced by investors.

With the positive reading, however, the overall UK outlook for the economy remains weak with views of recession potential. With Governor Andrew Bailey's recent comments, placing emphasis on the need for higher rates for an extended period could place some challenges on the UK’s economy. There is another side to this though as the improvement in business activity is attributed to a drop in UK inflation, the latest UK inflation report presented a decline in CPI from 6.7% to 4.6%, and although the economy managed to avoid a recession, with GDP holding at 0%, the challenges are still prominent for the UK.

The US Dollar Index recovered from the recent losses with improvement in US Treasury yields and traded higher on Friday. The yields on US 10-year and 2-year bond coupons improved at 4.46% and 4.94%.

The investor appetite for probability of no further additional interest rate hikes by the Federal Reserve is contributing to a risk-on sentiment, potentially impacting the strength in the US Dollar, with market sentiments changing to the evolving expectations surrounding Federal Reserves monetary policy.