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UK Service Sector Growth Bolsters Pound US Dollar (GBP/USD) Exchange Rate Outlook

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Pound (GBP) Exchange Rates Climb on UK Service Sector Pickup

The outlook for the Pound US Dollar (GBP/USD) exchange rate grew slightly more positive on Monday as the UK’s latest purchasing managers’ index readings proved upbeat.

According to IHS Markit, the UK services PMI printed at 54.5 in February, up from the previous month’s 53 and the market forecast of 53.3.

This reading pointed to the strongest pace of expansion since October 2017, with the incoming new business reading rising the most since May last year, and employment expanding at its fastest rate in over 5 months.

With the service sector being the UK’s largest contributor to GDP, the upbeat survey bodes extremely well for the UK’s overall economic outlook.

It should also be noted, however, that cost inflation dropped to an 18-month low – though for many analysts this does not diminish the chances of a rate hike from the Bank of England (BoE) in May.

Chief Economist Chris Williamson, for example, stated:

‘With Bank of England policymakers sounding hawkish even following the January fall in the PMI to a one-and-a-half year low, the February upturn in the surveys surely leaves a May rate hike very much in play. The Bank seems keen to normalise interest rates even if output growth is below levels it would usually like to see when tightening policy’.

Fears of a Global Trade War Limit US Dollar (USD) Exchange Rate Potential

The outlook for the US Dollar (USD) grew slightly gloomier on Monday as markets responded cautiously to the latest round of trade war threats from various nations.

US President Donald Trump spoke last week, announcing his intentions to impose tariffs on steel and aluminium imports at 25% and 10% respectively.

These measures are intended to protect and preserve the US steel industry and to position the US on more even ground against other nations that have high tariffs against US goods.

Nonetheless, currency markets tend to dislike any form of trade intervention, and with the European Union threatening to impose higher tariffs in retaliation, some analysts are concerned that the US push for fairer trade could limit them in the long run.

Indeed, European Commission President Jean-Claude Juncker has since announced that the bloc is prepared to retaliate by targeting brands like Levi Strauss and Harley Davidson, with China’s Vice Foreign Minister Zhang Yesui announcing that Beijing doesn’t want a trade war, but wouldn’t allow its interests to be damaged.

President Trump was unconvinced by these threats, however, tweeting:

‘If the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a tax on their cars which freely pour into the US. They make it impossible for our cards (and more) to sell there. Big trade imbalance!’

Whether this will extend beyond talk waits to be seen, but in the meantime markets are treading cautiously around the ‘Greenback’.

US Fed Rate Hike Anticipation Builds – What can we expect for the Pound US Dollar (GBP/USD) Exchange Rate?

The Pound US Dollar (GBP/USD) exchange rate could come under pressure this month as markets prepare for the US Federal Open Market Committee (FOMC) meeting, scheduled for March 20-21st.

Markets are widely anticipating a rate hike from the central bank, with the Fed’s new Chairman, Jerome Powell, reflecting a similar sentiment in his recent Congressional testimony.

Powell cited the higher-than-expected US inflation reading and record-low unemployment rate as justifications for ongoing gradual rate hikes throughout the year, and whilst the Fed hasn’t outright added a fourth rate hike to its 2018 outlook, his comments did suggest that the central bank could be preparing to move as soon as March.

This was largely due to the Chairman indicating that previous projections for 3 rate hikes this year were based on old, less positive data.

With the latest data proving more upbeat, however, markets are hoping that this could swiftly change – a prospect that could leave the Pound US Dollar exchange rate under significant pressure.