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Surging UK Manufacturing Activity Pushes GBP/USD Exchange Rate Higher

January 3, 2017 - Written by Tim Boyer

The Pound to US Dollar exchange rate continued its modest recovery attempt on Wednesday afternoon but if the evening’s Fed minutes report impresses traders it may give up its gains quickly.

Thursday will see the publication of UK and US services and composite PMIs, from Markit and ISM respectively. UK services PMI in particular could improve GBP trade if it impresses.

(Previously updated 03/01/2017)

The GBP/USD exchange rate is strengthening today, with Pound Sterling investors cheered by a strong, unexpected rise in manufacturing activity to close off the past year.

Markit PMI Leaps Up in December; Pound Sterling to US Dollar Exchange Rate Climbs



The latest measure of manufacturing activity shows that UK industry ended 2016 on a positive note. The Markit manufacturing PMI had been expected to hold steady at 53.3 but instead leapt up to 56.1.

According to Markit, the latest climb has seen the sector strike its highest level in two-and-a-half years, while output and new order growth both clocked in around the highest levels in 25 years.

Markit Senior Economist Rob Dobson explains;

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‘The boost to competitiveness from the weak exchange rate has undoubtedly been a key driver of the recent turnaround, while the domestic market has remained a strong contributor to new business wins. A plus point from the December survey was that the expansion was led by the investment and intermediate goods sectors, suggesting capital spending and corporate demand took the reins from the consumer in driving industrial growth forward.’

US Dollar (USD) Firms as Focus Turns to Incoming Trump Inauguration



It is just over two weeks until President-Elect Donald Trump officially takes power as the leader of the United States.

Trump has promised to implement bold new stimulus spending plans, which markets have responded to positively due to the implications for the US economic outlook; particularly inflation.

However, commentators have warned that investors are overlooking the downside risks to the economy that Trump brings with him, mainly his negative stance on immigration and free trade agreements.

But the markets continue holding high hopes for this year’s US monetary policy, keeping the US Dollar on the rise. Fed Funds futures already show a 63.8% chance of further tightening in June, which would take the lower bound to 0.75% and the upper bound to 1.00%.

GBP/USD Exchange Rate Forecast; Article 50 and US Monetary Policy in Focus



In the absence of any further UK data until tomorrow, focus could return to the main event of 2017 as far as the UK is concerned; the triggering of Article 50 by late March at the latest.

Tomorrow’s data will further help flesh out the picture of the H2 performance of the UK economy in 2016 following the vote for Brexit, with December’s Markit construction PMI and November’s consumer credit and mortgage approvals data on the cards.

Meanwhile, US Federal Reserve rate hike bets could receive a boost later today if the ISM manufacturing index for December ticks higher by half a point to 53.7 as forecast.
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