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Strong Construction PMI Not Enough to Boost GBP/INR

June 2, 2017 - Written by Toni Johnson

A strong UK construction PMI has been unable to support the Pound Sterling to Indian Rupee exchange rate today.

GBP/INR has declined -0.3% to 82.7830, even though the Markit UK construction PMI for May surprised by leaping to a 17-month high of 56 instead of weakening from 53.1 to 52.7 as expected.

IHS Markit Senior Economist Tim Moore explained;

‘The forward-looking elements of the latest survey are reassuring for the construction sector, notably the acceleration in new business growth to its strongest so far this year’.

While this provides more evidence that the economy made have rebounded from the slowdown in growth seen during the first quarter, markets are somewhat reticent to take the survey at face value, given that recent PMIs have tended to paint a rosier picture of the economy than official data from the ONS.

Additionally, election jitters are weighing on Sterling, with just four days of trading left until the polls close.

While INR may be advancing versus the Pound, the Rupee is facing some headwinds itself as markets continue to digest the fact that the Reserve Bank of India’s (RBI) shock demonetisation of the two largest denominations of Rupee notes last year caused economic growth to slow.

Many economists predict growth will rebound, but at 6.1% in the final quarter of 2016 India’s economy lost its mantel as the world’s fastest-growing large economy to China.

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The Indian Rupee could receive some support early on Monday if the Nikkei services PMI for May rises from 50.2 - showing the sector is barely growing at all - to a solid 52.3.

Attention will then be focussed on Wednesday, when the RBI meets to set interest rates.

A recent poll of 60 economists found that 56 expected no changes from the Monetary Policy Committee (MPC), which would mean the interest rate will remain at 6.25%.

However, given that inflation remained well below the 4% target in April for the sixth month in a row, economists believe the MPC statement will be significantly less hawkish than in previous instances and may open the door to interest rate cuts in the coming months.

This would weaken demand for the Indian Rupee, potentially allowed GBP/INR exchange rates to make strong gains.
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