• Mixed US Nonfarm Payrolls data initially fails to boost USD, but ISM Manufacturing PMI lifts sentiment.
• UK business activity remains in contraction, but inflation nears 7%, complicating BoE’s next move.
• Office for National Statistics revises UK economic size, indicating a 0.6% growth in Q4 2021 compared to Q4 2019.

The Pound Sterling (GBP) slumped late in the New York session versus the Greenback (USD) as US Treasury bond yields rose and bolstered the USD, which is set to print its seven consecutive week printing gains. The GBP/USD hit a daily high of 1.2712 before reversing its course and diving toward the current exchange rate, trading at around 1.2590s.

GBP/USD drops as US business activity improves, while UK factory activity remains at recessionary levels

Financial markets have remained calm after a busy week in the US economic landscape. The August Nonfarm Payrolls data showed a mix, with 187,000 jobs added, beating the 177,000 estimate. However, the rise in the Unemployment rate to 3.8% YoY, above the forecasted 3.5%, surprisingly didn’t boost the US Dollar. Investors speculate that the Federal Reserve might delay tightening monetary conditions in September, leading to reduced bets on rate hikes by November.

Consequently, the GBP/USD initially surged towards its daily peak. However, a business activity report surpassing expectations triggered a reversal, causing the Pound to relinquish those gains. The ISM Manufacturing PMI increased from 46.4 to 47.6 in August, exceeding the projected 47. Most subcomponents of the report improved, indicating a more optimistic perspective on business activity in the US.

Another reason that underpinned the buck was US bond yields recovering some lost ground, which underpinned the US Dollar Index (DXY) back above the 104.000 figure, a tailwind for the USD/CHF pair.

Earlier data in the UK showed that British business activity remained in contractionary territory, dropping for six consecutive months below the 50 threshold, as revealed by the S^&P Global/CIPS Manufacturing PMI, coming at 43.0 from 45.3 in July. That makes the case for a Bank of England (BoE) pause on its tightening cycle, but inflation remains close to 7%. Nevertheless, traders foresee a 25 bps rate increase in the upcoming meeting.

However, there is a silver lining. The Office for National Statistics has revised its assessment of the UK economy, indicating that it was 0.6% larger in the fourth quarter of 2021 than in the final quarter of 2019. This contrasts with the prior estimate of a 1.2% reduction in size.