Although opinion polls continue to point towards a narrowed lead for the Conservatives the mood towards the Pound nevertheless improved at the start of the week.
As investors still take opinion polls with a healthy pinch of salt the odds remain on for the Tories to secure an increased majority in the snap election.
This has helped to support the Pound US Dollar exchange rate, even though the path towards Brexit remains far from clear at this juncture.
Even so, domestic data is unlikely to encourage particular confidence in Sterling in the near future.
Forecasts point towards a weakening in May’s raft of UK PMIs, with economic activity thought to have slowed further on the month.
After the disappointing slowdown seen in the first quarter any further weakness could encourage investors to pile back out of the Pound.
Of particular concern would be any particular softening of the services PMI, given that the sector accounts for more than three quarters of UK economic activity.
On the other hand, if the economy shows signs of rebounding in the second quarter then GBP exchange rates could find a fresh rallying point.
While the uncertainty of Brexit is likely to weigh on the domestic outlook for some time to come evidence of greater economic resilience would give markets cause for confidence in the short term.
Demand for the US Dollar, meanwhile, remained generally muted as investors continued to revise their expectations for the June Federal Reserve policy meeting.
The odds of an imminent interest rate hike have weakened markedly in recent weeks, having previously climbed to a state of near-certainty, in response to disappointing data and a sense of political unease.
Although worries over the Trump administration’s ability to deliver on its promised fiscal reforms and infrastructure investment have eased somewhat the ‘Greenback’ remains under pressure.
April’s personal consumption expenditure data could offer further support to the GBP USD exchange rate, with investors anticipating a slight downtick in domestic inflationary pressure.
However, the appeal of the US Dollar may pick up if Thursday’s ISM manufacturing index strengthens on the month.
As analysts at Wells Fargo noted:
‘We continue to expect the industrial sector to slowly improve this year as global growth begins to firm and domestic business investment slowly begins to pick up once again. Our expectation is that industrial production will accelerate to around 3.0 percent in the second quarter, making up ground lost in Q1 before averaging 2.4 percent in both the third and fourth quarters of this year.’
A strong showing here could encourage bets that the Fed will opt to raise interest rates in June, even if the latest inflation data proves disappointing.
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