The Pound to US Dollar exchange rate rose to a fresh 4.5-year high of 1.6922 yesterday in reaction to the robust UK Manufacturing PMI reading.
Markets had been primed for a Purchasing Managers Index of 55.4, but the actual result was a far more optimistic 57.3. The 5-month high score showed that domestic demand contributed largely to the improvement, but that export orders also increased. This suggests that the recent improvements in the labour market are helping firms to meet the demands of expanding businesses across the United Kingdom.
The upswing in exports implies that foreign buyers are not being put off by the recent appreciation of Sterling – a strong domestic currency can often have a negative impact on exports because it make goods priced in said currency more expensive to importers. This is good news. If the Pound’s relative strength was seen to be weighing on export growth it is possible that the Bank of England could opt to hold off on hiking interest rates as not to exacerbate the situation. As things stand, however, the BoE looks set to start raising rates around the second quarter of next year.
Demand for the US Dollar remained muted yesterday following Wednesday’s disastrous 0.1% Q1 annualised GDP print, which undershot expectations of 1.2%. The ‘Greenback’ was treated to a mixed deck of ecostats yesterday: ISM Manufacturing rose for the eighth month on the trot, to 54.9, whilst Jobless Claims ticked higher by 14,000 to a 2-month high of 344,000.
With GBP to USD trading at dizzying heights, in reach of the extremely important 1.7000 handle, it is an exciting time for traders of the Pound. If this afternoon’s key US Non-farm Payrolls report comes in weaker-than-anticipated, as a large portion of American indicators have over the past few months, it is possible that the Pound to US Dollar exchange rate could breach 1.7000.
However, it is unlikely that Sterling will have the momentum to assert itself above 1.7000; it is far more likely that GBP/USD will rebound lower if that level is reached because it could trigger a spree of sell orders.
The NFP report is expected to come in at 215,000, a fairly respectable score, which, if met, could bolster demand for the ‘Greenback’. It is entirely likely that GBP/USD could fall back towards 1.6800 if the labour market figure impresses.
Data in Britain is expected to show another month of expansion in the Construction Sector. However, the Construction print will probably play second fiddle to the NFP on Non-farm Friday.
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