Weak UK PMIs send pound lower, increase chances of November BoE rate pause

The British pound (GBP/USD) continued its multi-week decline after survey data revealed a significant slowdown in the UK economy during September, surpassing any slowdown experienced since the Covid lockdown period.

The S&P Global Composite PMI dropped from 48.6 in August to 46.8, falling below the consensus forecast of 48.7. A reading below 50 indicates contraction.

The findings were in line with hints from the minutes of the Bank of England’s Monetary Policy Committee meeting earlier this week. These findings seemed to influence the MPC’s decision to vote in favor of maintaining the interest rates at 5.25%.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented on the reading in an official press release:

“The disappointing PMI survey results for September mean a recession is looking increasingly likely in the UK. The steep fall in output signalled by the flash PMI data is consistent with GDP contracting at a quarterly rate of over 0.4%, with a broad-based downturn gathering momentum to hint at few hopes of any imminent improvement.”

“With the Bank of England having had sight of the survey data prior to its latest policy decision, the worrying signals from the survey of heightened recession risk and cooling inflationary pressures are likely to have added to calls to halt rate hikes.”

As for the components of the report, services — the UK’s largest sector of the economy — saw a contraction with a PMI reading of 47.2. This figure fell below expectations of 49.2 and was lower than August’s reading of 49.5.

The manufacturing sector also stayed in contraction territory with a PMI of 44.2. However, this was slightly higher than the consensus expectation and the August reading of 43.

“It’s another dismal outcome,” James Smith, Developed Markets Economist at ING, said of the data. “We think the Bank will remain on hold in November and that August’s rate hike marked the top in this tightening cycle.”

Forex markets reacted following the release of the data, with the pound to dollar exchange rate trading at $1.226 at the time of writing, reflecting a 0.26% decrease for the day.

The pound to euro exchange rate (GBP/EUR) saw a 0.15% decrease to trade at 1.1515.

Both losses build on the declines that followed the Bank of England’s Thursday decision to keep interest rates unchanged.