GBP/USD holds above 1.3400 as US PMI strength offsets fiscal worries

• GBP/USD consolidates near 1.3410 on Thursday, retreating from a three-year high as traders assess PMI data and broader macro risks.
• US PMIs beat expectations across services and manufacturing, reinforcing the Fed's cautious stance on holding rates steady.
• UK Composite PMI improves but remains below 50, with manufacturing still in contraction despite a rebound in services.

The British Pound (GBP) is navigating choppy price action against the US Dollar (USD) on Thursday, holding above the 1.3400 psychological mark to trade near 1.3410 during the American session, as traders digest the latest business activity data from both sides of the Atlantic. The pair shows signs of indecision after retreating from a three-year high of 1.3468 reached on Wednesday. 

On the other hand, the US Dollar Index (DXY), which tracks the value of the US Dollar against the six major currencies, is showing a mild recovery from the two-week low, ending its three-day decline to trade just below the 100.00 mark. 

In May, the US economy showed stronger momentum, with the S&P Global Flash Composite Purchasing Managers Index (PMI) rising to 52.1 from 50.6 in April, signaling a faster pace of expansion. Manufacturing activity improved notably, with the Manufacturing PMI rising to 52.3 from 50.2, while the Services PMI increased to 52.3 from 50.8. The broad-based improvement indicates resilience in both sectors as the demand remains steady, keeping the Federal Reserve (Fed) on a cautious path and reinforcing the case for holding interest rates steady in the near term.

Conversely, the United Kingdom's (UK) S&P Global Composite PMI rose to 49.4 from 48.5 in April, indicating a slower pace of contraction in private-sector activity. The services sector returned to expansion territory, with the Services PMI increasing to 50.2 from 49.0, while manufacturing remained in contraction, as the Manufacturing PMI slipped to 45.1 from 45.4. The data offers a mixed view of the UK economy, with strength in services providing some support to the British Pound, but underlying weakness in manufacturing still weighing on the outlook

However, the upbeat business activity data on the US front is tempered by broader concerns over the US fiscal outlook. The House of Representatives passed a controversial tax and spending package expected to widen the federal deficit by nearly $3.8 trillion over the next decade. This follows Moody's decision last week to downgrade the US credit rating to Aa1, citing rising debt levels and a worsening budget trajectory.

In the UK, UBS forecasts that the Bank of England (BoE) will reduce interest rates to 3.75% by the end of 2025 to address inflation and wage growth pressures. Adding to the complexity, the UK's recent trade agreement with the US has drawn criticism from the European Commission, which accuses the UK of potentially breaching World Trade Organization (WTO) rules. The deal, which includes tariff reductions on certain goods, may strain the UK's post-Brexit relationship with the European Union (EU) and contribute to broader market uncertainty.

Market participants are now turning their attention to upcoming data releases and central bank commentary. The UK's GfK Consumer Confidence index for May is scheduled for release on Friday. Additionally, April's retail sales data will be closely watched for signs of consumer spending trends. In the US, speeches from Federal Reserve officials, including Kansas City Fed President Jeffrey Schmid, are anticipated to shed light on the central bank's policy outlook.