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Summary: The UK Services PMI came in at 55.9 in April, up significantly from 52.9 in March and the highest level since April 2022. S&P Global highlighted that the demand situation continues to improve, and increased wage payments are leading to intensified cost inflation. The S&P Global Composite PMI was finally set at 54.9, up from 52.2 in March.

Fundamentals

Strong growth in the UK services sector in April meant the UK economy started the second quarter of 2023 in a positive fashion. Despite manufacturing production falling again in April, overall output in the private sector grew at its fastest pace in a year.

Service providers saw the sharpest increase in new work in 13 months, as a combination of resilient consumer spending and improved demand for business services boosted overall order intake. Customers' willingness to spend improved, thanks to their increased confidence in the near-term economic outlook. Strong growth in travel, tourism, and leisure spending, as well as a continued recovery in international visitors, were the drivers of the services economy in April. In contrast to the continued decline in export sales reported by goods producers, total new orders from overseas in the UK have increased for five consecutive months.

Despite much-improved growth prospects for the services economy this spring, a rapid rebound in customer demand appears to have reignited inflationary pressures. Input costs and average prices both rose at a faster pace in April, with service providers attributing the lion's share of the increase to higher employee wages. Approximately 34% of respondents in the survey reported price increases in April, which is roughly triple the pre-pandemic average.

The U.S. dollar remained weak even after the FOMC decided to raise rates by 25 basis points as expected and signaled room for further tightening. The relatively tough rhetoric proved unsettling for investors about how rising borrowing costs could push the U.S. economy to the brink of recession.

Meanwhile, as UK inflation continues to soar, the market widely anticipates another interest rate hike by the Bank of England to boost the pound.

Technical Analysis

GBPUSD has retreated after climbing to a new 11-month high of 1.2585 last week and has found important support near its 20-day SMA. For now, the market is still well above the long-term uptrend line, suggesting that there is still more upside to come. The MACD is moving sideways in positive territory, while the RSI is slightly above the neutral range of 50.

At present, the asset continues to move higher all the way through its short-term timeframe, with its higher lows and higher highs holding the connection to the uptrend line that has been in place since mid-April. The price is currently once again meeting resistance at the top of the channel, which suggests another pullback is imminent. The Fibonacci retracement tool shows the level where the bulls may wait.

The 38.2% level is at 1.2531, followed by the 50% Fibonacci level near the channel's mid-region at 1.2513 and the 100 SMA dynamic inflection point. A larger correction could touch the 61.8% Fibonacci close to the 1.2500 major psychological mark or the 200 SMA dynamic support.

On the subject of moving averages, the 100 SMA is above the 200 SMA indicating that the path of least resistance is to the upside, or that support levels are more likely to hold than to break down. This also means that a break above the top of the channel around 1.2600 is possible.

However, the stochastic oscillator in the short-term (1-hour) timeframe is already overbought, so a move lower would signal a return of selling pressure. Likewise, the RSI is in overbought territory, indicating that the bulls are exhausted.

Overall, GBPUSD continues to maintain its upside structure and only a break below the uptrend line and 200-day SMA at 1.1940 will turn the outlook to negative. In terms of trading, it's recommended to buy the dips.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.2530

Target Price: 1.2810

Stop Loss: 1.2350

Valid Until: 2022-05-18 23:55:00

Support: 1.2485, 1.2436, 1.2367

Resistance: 1.2607, 1.2669, 1.2775