Pound Sterling drops sharply ahead of US ISM Manufacturing PMI data

• The Pound Sterling faces a sell-off near 1.2750 ahead of a US data-packed week.
• UK’s stubborn service inflation keeps the uncertainty about the timing of BoE rate cuts.
• Investors await the US ISM Manufacturing PMI data for fresh guidance.

The Pound Sterling (GBP) falls on backfoot in Monday’s London session but holds the crucial support of 1.2700 against the US Dollar (USD). The GBP/USD pair comes under pressure at the beginning of a data-packed week in the United States (US), which will kick off with the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) data for May, to be published at 14:00 GMT.

Economists expect the PMI, which gauges factory activity,  to rise to 49.8 from the prior reading of 49.2 but to remain below the  50.0 threshold that separates expansion from contraction. However, the preliminary S&P Global PMI report for May – another survey that also gauges activity in the US manufacturing sector – showed that the PMI rose to a two-month high at 50.9 from April’s reading of 50.0.

In the PMI report, investors will also focus on other subcomponents, such as the New Orders and Price Paid indexes, as they give insights into the demand outlook and change in input prices of the manufacturing sector.  Analysts take both indexes as good leading indicators of upcoming inflation pressures.

Later this week, investors will keenly watch the US ISM Services PMI and the official Employment data to be published on Wednesday and Friday, respectively. Meanwhile, there aren’t any top-tier events in the United Kingdom (UK) economic calendar.

Daily digest market movers: Pound Sterling drops against US Dollar ahead of Manufacturing PMI

• The Pound Sterling exhibits weakness against the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, also exhibits a mute performance of around 104.60.
• The US Dollar struggles for direction as investors look for fresh cues about when the Fed will start reducing interest rates. Investors remain uncertain about the timing after the US Personal Consumption Expenditure Price Index (PCE) report showed on Friday that price pressures remained elevated in April. Still, the report also showed weak Personal Spending data.
• Annual core PCE inflation, the Fed’s preferred inflation measure, grew expectedly by 2.8%. On a month-on-month basis, the underlying data grew by 0.2%, missing estimates and less than the prior reading of 0.3%. 
• Personal Spending rose at a slower pace of 0.2% in April, less than estimates of 0.3% and the former release of 0.7%. A significant deceleration in consumer spending, which accounts for more than two-thirds of US economic activity, raised concerns over a deepening household crisis due to the Fed maintaining interest rates higher for a longer period.
• After weak consumer spending data, investors have become slightly more confident that the Fed will cut interest rates at least once this year. The CME FedWatch tool shows that the probability of a rate cut in the September meeting has increased to 52% from 49% a week ago.
• In the UK, investors remain uncertain about the Bank of England’s (BoE) rate-cut time frame. Financial markets expect that the BoE could start reducing interest rates from the August meeting. UK annual headline inflation has come down significantly to 2.3% in April but BoE policymakers remain worried about slower progress in the service disinflation process. UK service inflation is at 5.9%, broadly driven by wage growth, is much higher than what is needed to ensure that inflation will return to the desired rate of 2%.
• Meanwhile, UK inflation expectations for the next 12 months have dropped significantly. A monthly Citi/YouGov survey showed that public expectations for next year decelerated to 3.1% in May, which is the lowest level since July 2021.

Technical Analysis: Pound Sterling drops from 1.2750

The Pound Sterling is under pressure and has dropped from 1.2750. The GBP/USD pair exhibits a sharp volatility contraction as it trades in a Descending Triangle formation in the 4-hour time frame. The downward-sloping border of the above-mentioned chart pattern is plotted from May 28 high near 1.2800, while the horizontal support is marked from May 24 low at 1.2676.

The 50-day Exponential Moving Average (EMA) trades closely to the spot price near 1.2720, suggesting a sideways trend.

Meanwhile, the 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating indecisiveness among market participants.