Improved UK Manufacturing PMI Fails to Boost Pound Sterling US Dollar (GBP/USD) Exchange Rate
An uptick in November’s UK manufacturing PMI failed to shore up Pound Sterling (GBP) at the start of the week, with the underlying details of the report proving less encouraging.
Even though the headline index strengthened from 51.1 to 53.1 this improvement was driven by an increase in domestic demand as export orders contracted for a second consecutive month.
This suggests that the UK economy is still coming under pressure as the Brexit deadline looms larger on the horizon.
As Rob Dobson, Director at IHS Markit, noted:
‘The November PMI provided a lacklustre picture of the UK manufacturing sector, as ongoing global trade tensions and Brexit uncertainty weighed on current business conditions and dampened the outlook for the year ahead.
‘Although November saw the headline PMI regain some lost ground and trends in output, new orders and employment picked up slightly from a weak October, growth is still among the weakest seen over the past two-and-a-half years.’
This left the Pound Sterling to US Dollar (GBP/USD) exchange rate on a downtrend, dropping to a fresh three-month low of 1.27.
US Dollar (USD) Exchange Rate Gains Limited by Market Risk Appetite
With market risk appetite generally improved the US Dollar (USD) struggled to capitalise on the weakness of the Pound.
As trade tensions between the US and China showed some signs of easing the appeal of the safe-haven USD diminished.
Although November’s ISM manufacturing index improved markedly on the month, rising from 57.7 to 59.3, this failed to give USD exchange rates any significant boost.
Even so, the US Dollar could find a fresh rallying point ahead of the weekend if the latest US labour market data proves encouraging.
As long as the labour market continues to tighten this should keep the Federal Reserve in a more positive frame of mind, increasing the chances of further interest rate hikes.
However, any easing in average hourly earnings could put a significant dampener on the US Dollar.
Stronger Services PMI to Boost Pound Sterling (GBP) Exchange Rates
Demand for the Pound could pick up once again, however, if Wednesday’s UK services PMI proves more positive in nature.
As the service sector remains the primary growth engine of the UK economy a strong showing here would give investors greater cause for confidence in the domestic outlook.
However, if all of November’s UK PMIs highlight a greater sense of business caution and stockpiling this could put GBP exchange rates under pressure.
Even if signs point towards the UK economy recovering some momentum in the fourth quarter the Pound could still weaken if this growth appears less sustainable in nature.
Commentary from Bank of England (BoE) Governor Mark Carney could provoke further volatility for the GBP/USD exchange rate, meanwhile, when he appears before the Treasury Select Committee.
Questions regarding the Bank’s Brexit analysis are likely to encourage market jitters, especially if the BoE looks set to leave interest rates on hold for the foreseeable future.