GBP forecast: PMIs put more pressure on pound

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:

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.

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GBP/USD forecast: Most analysts see further weakness for sterling

Economists at MUFG Bank weighed in on the BoE’s decision and the future outlook for the pound:

On September 22, ING’s Global Head of Markets, Chris Turner, wrote:

Scotiabank Chief Currency Strategist Shaun Osborne was more confident in his bearish outlook:

In their latest FX Snapshot on September 18, analysts at Citibank Hong Kong said:

Citi’s 3-month pound to dollar forecast was surprisingly bullish, considering the current rate of $1.22, placing the GBP/USD exchange rate at a potential average of $1.26. The 6-to-12-month forecast, however, was bearish, suggesting that the pound to dollar rate could drop to $1.19, according to the bank.

Citi’s long-term GBP forecast, however, was bullish, projecting the GBP/USD pair to recover and trade at a potential average of $1.40.

The GBP/USD forecast from Australian bank Westpac, last updated on September 22, was also bullish, and saw the pair trading at $1.27 in December 2023, $1.28 in March 2024, and $1.29 in June 2024, indicating a potential bullish trajectory for the pound. The bank is set to update its weekly forex projections next week.

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