A surge in US business activity has reinforced expectations for further Fed hikes, extending the dollar's advance.
The Pound to Dollar exchange rate extended its slide and fell to 1.3262 after US business activity surged in September, reinforcing the case for further Federal Reserve rate hikes.
The US flash composite PMI jumped to 58.4 from 56.0, far above the 53.7 consensus, and its highest level since July 2021.
Services climbed to 58.7 from 56.5 against expectations of 55.8, while manufacturing rose to 57.0 from 53.9.
"Strong US composite PMI data revived inflation concerns, reinforcing expectations of further Federal Reserve rate hikes," says a reaction note from Julius Baer, the investment bank.
The composite input prices index jumped to a 46-month high of 66.1 from 58.9, reflecting the renewed climb in energy prices.
A Fifth Day of Dollar Gains
"The dollar is on course for a fifth consecutive daily gain as a hawkish repricing of the Federal Reserve's expected policy path rolls on," says Karl Schamotta, Chief Market Strategist at Corpay.
Richmond Fed President Thomas Barkin warned on Tuesday that repeated supply shocks could endanger the central bank's price stability mandate and that further tightening may be needed.
Markets put the odds of an October hike at more than 50%, with three moves priced by next June.
"Rate differentials have tilted further against all of the dollar's major rivals, contributing to losses in spot markets," says Schamotta.
The third-quarter average of 56.3 is consistent with core GDP rising at an annualised pace of around 4% this quarter, according to Pantheon Macroeconomics, roughly in line with the 4.2% pace in the second quarter.
"A few of the major components of the S&P PMI ought to be handled with care, but there is no getting around the fact that this is a strong report," says Oliver Allen, Senior US Economist at Pantheon Macroeconomics.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialistPound Sterling Weighed by PMI Undershoot
As the dollar benefits from a stellar business survey outcome, the same can't be said for the pound.
The UK composite PMI fell to a three-month low of 51.7 in September, missing the 52.0 consensus.
Markets continue to price around 100 basis points of Bank of England tightening over the next twelve months, an expectation analysts increasingly question will be achieved.
Deutsche Bank turned seller of the pound this week, citing the disappearance of the risk premium around UK fiscal policy.
The OECD trimmed its 2027 UK growth forecast to 1.0% on Wednesday, pointing to the drag from higher interest rates.
The Decline Can Extend
Eurozone activity reached a three-year high in September, driven by an unexpected surge in services, and Julius Baer says rebounding oil prices with Brent topping $100 have stoked broader inflation fears across developed markets.
Brent is steadying near $100 a barrel after five days of losses, with Saudi Arabia restarting its East-West pipeline, US crude inventories rising 1.7m barrels against expectations of a draw, and President Trump describing recent talks with Iranian officials as "very productive."
Corpay expects the dollar to stay supported while traders hold a hawkish view of the Fed, though it sees the upside as capped.
"The 'US exceptionalism' trade is once again on fragile footing," says Schamotta, who advises hedgers with positive exposure to crystallise gains where they can.
Core PCE inflation data next week is the next test of the hawkish repricing, and a firm reading would leave GBP/USD without obvious support until 1.3250.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
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