Improved UK Services PMI Encourages Pound US Dollar Exchange Rate Gains
The Pound to US Dollar (GBP/USD) exchange rate rose to its highest level since April 2018 in the wake of an improved UK services PMI.
Although the PMI remained trapped below the neutral baseline of 50, still signalling a monthly contraction, this was not enough to drag Pound Sterling (GBP) down.
Investors were instead relieved by the unexpectedly strong improvement in the index, which picked up from 39.5 to 49.7 in February.
While the service sector remained a drag on economic activity this month the Pound still took encouragement from the fact that its decline had not worsened.
Even though the risk of a negative first quarter gross domestic product reading remains, thanks to the significant impact of the service sector results, the appeal of the Pound improved ahead of the weekend.
Strong US Manufacturing PMI Forecast to Boost US Dollar Demand
While forecasts point towards another solid monthly performance from the latest US manufacturing and services PMIs this failed to keep the US Dollar (USD) from shedding some ground.
With market sentiment turning more bullish in nature the appeal of the safe-haven US Dollar naturally weakened, even though uncertainty over the Covid-19 crisis remains.
In the wake of a higher-than-expected weekly increase in initial jobless claims USD exchange rates came under greater pressure.
This latest evidence of weakness within the US labour market weighed heavily on the minds of investors, even with further fiscal stimulus measures on the horizon.
However, if this afternoon’s manufacturing and services PMIs print as solidly as forecast this could offer the US Dollar a leg up against its rivals.
Another strong monthly expansion for the manufacturing sector would increase the odds of a positive first quarter growth rate, giving USD exchange rates greater cause for confidence.
Signs of UK Labour Market Weakness to Weigh on GBP Exchange Rates
Support for the Pound may falter next week, even if optimism over the UK’s rollout of Covid-19 vaccines lingers.
Although markets remain hopeful that lockdown conditions could ease and the UK economy could begin to recover sooner than its rivals this may not keep the GBP/USD exchange rate on a positive footing.
The release of December’s labour market data could put a fresh dampener on demand for the Pound, with forecasts pointing towards a rise in the unemployment rate.
Signs of the labour market weakening in December, even in the face of the month’s temporary loosening of Covid-19 restrictions, this may weigh heavily on GBP exchange rates.
With the weak labour market likely to increasingly drag on economic activity any rise in unemployment could see the Pound to US Dollar exchange rate trending lower once again.
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