The pound moved away from 21-month lows against the dollar on Tuesday after slipping back into the 1.24 range at the start of the week.
It had been fettered by dollar strength on Monday ahead of both Federal Reserve and Bank of England (BoE) monetary policy meetings this week – but rose above 1.25 the following day compared with a multi-month low of 1.2412 hit last week.
The BoE gathering of rate-setters is expected to produce a 25 basis points (bps) interest rate hike on Thursday.
In recent weeks, the UK currency has felt the weight of diverging monetary policy between the BoE and Fed, with the US central bank expected to raise rates at a faster pace this year.
The UK manufacturing sector picked up slightly last month compared with a five-month low posted in March, according to figures released on Tuesday by the Chartered Institute of Purchasing and Supply and Markit Economics.
However, factory bosses cautioned that the war in Ukraine, Covid restrictions in China, and sluggish exports to EU customers post-Brexit are all taking their toll.
The closely watched S&P Global/CIPS Purchasing Managers’ Index (PMI) printed 55.8 for April, up from 55.3 the previous month. A score above 50 represents sector growth.
Fed policy meeting in focus for the dollar
The Fed meets on Tuesday and Wednesday when it’s expected to raise borrowing costs by 50bps to tackle inflation – which is soaring at its fastest pace in 40 years – and announce plans to reduce its $9 trillion balance sheet.
Money markets expect it to be the first in a series of aggressive hikes and are pricing in rises totalling 270bps by February 2023.
The dollar is also benefitting from the outlook for the US economy, which is expected to show more resilience than others in the face of red-hot inflation and slowing economic growth.
Investors are also focusing on the potential for the Fed to take a more hawkish tone than expected when it concludes its two-day meeting on Wednesday. Though the chances are considered slim, a 75bps hike and a faster pace of balance sheet reduction have not been ruled out.
The US manufacturing sector – which accounts for 12% of the domestic economy – expanded at its slowest pace in over 18 months in April. The ISM’s index of national factory activity dropped to a reading of 55.4, from 57.1 in March.
Several notable data sets are slated for publication in the US on Wednesday: ADP employment change, goods and services trade balance, and the S&P Global composite PMI. But it’s the Fed’s interest rate announcement that will be centre stage.