The pound has gained against the US dollar on Monday due to positive risk sentiment and the release of the Markit Manufacturing and Services PMI data for February. The PMI data has revealed that business activity in the UK private sector has continued to expand at a robust pace in February.
Markets and investors are optimistic that a diplomatic solution to the Russia-Ukraine crisis can be found. Later in the week, US President Joe Biden will meet his Russian counterpart Vladimir Putin. Over the weekend, however, various news channels reported that the US received information that Russia was preparing for military action against Ukraine. If geopolitical tensions escalate, this could weigh on the British pound.
IHS Markit PMI surveys
The UK economy bounced back in February, according to the latest IHS Markit PMI surveys. UK business activity was the strongest since June. With consumer spending increasing as the pandemic restrictions loosened, sectors such as travel, leisure and entertainment saw the highest activity. The flash UK Composite Output index for February came at 60.2, the flash UK services business activity index for February came at 60.8 and the flash UK manufacturing output index came at 57.3.
The PMI surveys also showed that high inflation persisted in February, with higher wages, energy bills and raw material costs pushing businesses’ operating costs higher.
Markit said: “The overall rate of input cost inflation was the steepest since last November and the second-highest since the index began in January 1998. This resulted in another sharp increase in average prices charged by private sector firms, although the latest rise was softer than at the start of the year.”
Bank of England interest rate hike in March
Chris Williamson, chief business economist at Markit, said that the Bank of England could deliver another interest rate hike as soon as March: “With the PMI’s gauge of output growth accelerating markedly in February and cost pressures intensifying to the second-highest on record, the odds of an increasingly aggressive policy tightening have shortened, with a third back-to-back rate rise looking increasingly inevitable in March.” Williamson has also warned that the rising cost of living, higher energy prices and uncertainty could affect the demand outlook and that both the manufacturing and services sectors would need to be closely watched.
Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said she was reviewing her forecast for UK GDP growth in the first quarter up to 0.6%, and added that the Bank of England will “almost certainly” raise interest rates in March. She noted that the sharp rise in the composite PMI in February indicates that the economy is recovering from Omicron.
JPMorgan economist Allan Monks noted the surge in the UK PMI data and said that while growth is not the Bank of England’s main focus at the moment, February’s PMI indicates “strong momentum in growth ahead of a set of headwinds that are due to intensify from April. To the extent this momentum limits damage to the labour market, we believe that it will further encourage the BoE to continue normalising rates in the coming months.”
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