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The Pound relinquished gains, a likely reflection of news that "employment was again a weak spot".
The British Pound was lifted by the release of PMI data for August that handily beat expectations, but the details in the report soon capped the currency's upside ambitions.
The headlines were good: The S&P Global Composite PMI for August rose to 53 from 51.5 in June, beating consensus predictions for an outcome of 51.6. The services sector drove the expansion, with the Services PMI rising to 53.6 from 51.8. This suggests the economy grew at a decent clip in August.
The survey also revealed that new business volumes expanded at the strongest pace since October 2024, implying strong growth ahead.
In previous months, such a handsome beat of expectations would have set the Pound on a path higher, and the initial response suggested the playbook was intact: GBP/EUR rose from 1.15440 to 1.1554 in the minutes following the release.
However, it soon dropped back to 1.1544. GBP/USD rose to 1.3460 from 1.3454 prior to the release before falling to 1.3448.
Sterling's failure to launch likely reflects findings that "employment was again a weak spot as total workforce numbers decreased for the eleventh month running and at a marked pace."
Financial markets might therefore be looking through the uptick in private sector activity, judging that widespread evidence of an employment slowdown points to weakness in the coming months.
The Pound's price action has echoes of the subdued response that followed Wednesday's consensus-defying rise in UK inflation figures, which lowered analyst expectations for a November interest rate cut at the Bank of England.
Financial market pricing shows that although investors are lowering the odds of rate cuts for the remainder of 2025, they are pricing in more rate cuts for 2026 as the Bank responds to falling employment. In short, the deterioration in the labour market - which today's PMIs corroborate - points to a backloaded dumping of rate cuts. This is proving a headwind to the Pound.
Fears that the UK is entering a period of stagflation are also unhelpful to those wanting a stronger Pound. The August PMI report finds: "Input cost inflation meanwhile edged up to its highest since May. Survey respondents continued to note that suppliers had sought to pass on increased National Insurance costs."
Higher payroll costs also resulted in another robust rise in prices charged by private sector firms in August, with service providers recording particularly strong inflationary pressures, said S&P Global.
Above: Official payroll data from the ONS paints a clear picture of politically-induced labour market deterioration.
It appears firms are no longer willing to shoulder the burden of rising wage costs and are shedding jobs. "Payroll numbers also continue to be cut at an aggressive rate by historical standards as firms cite weak order books and concerns over rising staff costs due to the policies announced in the autumn Budget, which also contributed to persistent inflation pressures," says Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
"We are very sceptical that this solid performance will last," says Matthew Ryan, Head of Market Strategy at Ebury, of the strong headline readings. "A hotter than usual summer is likely to be buoying the services sector, notably helping to prop up retail, tourism and hospitality activity. This will likely prove to be no more than a temporary sugar rush, however, rather than a sustained boom."
Ebury expects growth to moderate during the rest of the year, with rising labour costs, high inflation and acute fiscal policy uncertainty set to trigger a tightening of the belts among business owners and consumers alike in the coming months."