GBP USD Forecast: Pound US Dollar Exchange Rate Hits 31-Year Low on Brexit Worries

Modified: Tuesday, 4 October 2016 11:05 BST - Written by Frank Davies

STORY LINK GBP USD Forecast: Pound US Dollar Exchange Rate Hits 31-Year Low on Brexit Worries

Worries Over Brexit Weigh Down Pound Sterling (GBP) Exchange Rates as Early 2017 Trigger Announced

Demand for Pound Sterling (GBP) exchange rates has been decidedly weak after UK Prime Minister Theresa May announced that the government was aiming to trigger Article 50 before the end of March 2017.

Both the Pound Euro (GBP EUR) and Pound US Dollar (GBP USD) exchange rates recorded notable losses.

Markets did not receive this news well, particularly as the odds seem to increasingly lean towards the UK not retaining its access to the single market thanks to the harder line that politicians appear to be taking.

The mood towards Sterling was not improved on Tuesday morning despite a far stronger-than-expected Construction PMI, which clocked in at 52.3 rather than the forecast 49.

As Time Moore, Senior Economist at IHS Markit noted:

‘Construction firms appear reasonably optimistic about the near-term outlook, with confidence linked to the fastest rise in new orders since March and a more upbeat economic newsflow in general. However, the sector remains on a much weaker growth trajectory than seen at the start of 2016, which contrasts with the export-led surge in manufacturing production during September’

Robust Manufacturing Data Kept US Dollar (USD) Exchange Rate Confidence High

The appeal of the US Dollar (USD), on the other hand, remained robust thanks to renewed confidence in the outlook of the world’s largest economy.

Investors were greatly reassured to find that the ISM Manufacturing Index for September had bettered forecast to strengthen from 49.4 to 51.5, suggesting that the sector remains resilient in spite of previous concerns.

This seemed to raise the chances of the Federal Reserve acting to raise interest rates again sooner rather than later, encouraging the ‘Greenback’ to climb as higher odds of a December rate hike were priced in.

As a result, the Pound Sterling to US Dollar (GBP/USD) exchange rate slumped to a fresh 31-year low of 1.2765.

Stronger UK Services PMI Predicted to Offer GBP/USD Exchange Rate Rallying Point

Some measure of confidence could return to the Pound on Wednesday, however, with the release of the UK Services PMI for September.

Given that the service industry is responsible for more than three quarters of the UK’s economic activity the GBP/USD exchange rate is more likely to rally on the back of a stronger showing here.

If the final PMI betters expectations then the Bank of England (BoE) is less likely to have the incentive to cut interest rates further before the end of the year, a prospect that should encourage investors to buy back into the softened Pound.

However, with the latest US Non-Farm Payrolls report set for release on Friday the US Dollar could remain on a bullish trend across the board for the time being.

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