Weaker UK Manufacturing PMI Dents Pound US Dollar (GBP/USD) Exchange Rate
As the UK manufacturing PMI eased to an eight-month low this encouraged the Pound to US Dollar (GBP/USD) exchange rate to extend its downtrend further.
Even though the PMI only showed a modest dip on the month, retreating from 55.3 to 55.2, the underlying details of the survey were not overly positive for the UK outlook.
As Rob Dobson, Director at IHS Markit, noted:
‘Supply-chain delays are also reining in production growth. Any easing in these constraints would not only provide a further boost to growth, but also ease some of the pressure on input costs. Price inflation currently remains stubbornly high, as suppliers pass on higher commodity and raw material costs in part caused by demand outpacing supply. If this feeds into rising consumer prices, household spending could take a further knock in coming months.’
With price pressures looking set to increase further there is a risk that growth could suffer, given the significant role of consumer spending within the UK economy.
However, if the corresponding services PMI proves stronger than forecast this may well offer the Pound (GBP) a solid rallying point next week.
Rising Odds of Aggressive Fed Interest Rate Hikes Boost US Dollar Demand
The strength of the GBP/USD exchange rate has also been limited as markets continue to price in higher odds of the Federal Reserve raising interest rates as many as four times in 2018.
With new Fed Chair Jerome Powell adopting a generally rather hawkish outlook on monetary policy the chances of a March rate hike look rather high.
This has kept the US Dollar (USD) on a stronger footing, even though the second estimate of the US fourth quarter gross domestic product saw an unexpected downward revision.
While there is still some level of doubt over the underlying health of the world’s largest economy, and the ultimate impact of the Trump administration’s tax reforms, support for USD exchange rates nevertheless remains.
Even so, if the latest personal consumption expenditure figure falls short of forecast this could dent the US Dollar, given that this is the Fed’s preferred measure of inflationary pressure.
On the other hand, as long as Powell maintains a relatively upbeat tone on the subject of interest rates this is likely to limit the potential for any GBP/USD exchange rate rally.
Pound US Dollar Exchange Rate Volatility Forecast Ahead of May’s Brexit Speech
Speculation over Brexit is likely to continue weighing on the GBP/USD exchange rate over the coming days, with investors still jittery over the likelihood of an acrimonious divorce.
After the generally negative reaction to the EU’s first draft withdrawal treaty the prospect of a harder form of Brexit remains, to the detriment of the Pound.
Investors are concerned that the UK looks likely to lose its privileged access to the single market, given the pushback from Conservative backbenchers.
If Prime Minister Theresa May adopts a harder line on the subject in a major speech on Friday this could weigh heavily on the GBP/USD exchange rate.
With time fast running out for the UK and EU to agree a deal, given that little over a year remains before the final deadline, the Pound looks set to remain vulnerable to downside pressure.
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