Pound US Dollar Exchange Rate Recovers Ground on Strong UK Services PMI

November 3, 2017 - Written by Tim Boyer

STORY LINK Pound US Dollar Exchange Rate Recovers Ground on Strong UK Services PMI

Although the Bank of England (BoE) opted to raise interest rates at its November policy meeting this failed to buoy the Pound US Dollar exchange rate.

In fact, Sterling slumped sharply in the wake of the announcement as investors were discouraged by the less hawkish nature of the accompanying meeting minutes and Inflation Report.

As the BoE no longer suggested that markets are under-pricing the odds of further interest rate hikes the mood towards the Pound soured significantly, suggesting that this is not the start of a monetary tightening cycle.

Even so, the GBP USD exchange rate stabilised somewhat on Friday morning thanks to relatively upbeat comments from BoE deputy governor Ben Broadbent.

Bullish UK Services PMI Bolsters GBP Exchange Rates

Confidence in the Pound strengthened in response to a better-than-expected UK services PMI, which rounded out a trio of positive October PMIs.

This suggests that the domestic economy got off to a relatively strong start in the fourth quarter, raising hopes of a further improvement in the corresponding gross domestic product data.

As the service sector continued to expand at a solid level, with the PMI rising from 53.6 to 55.6, this indicates that the economy is still managing to largely shrug off the uncertainties surrounding Brexit.

After the sharp fall seen on Thursday the Pound could see further positive correction in the coming days, even if a sense of political uncertainty continues to mount over the stability of the minority Conservative government.

As Viraj Patel, foreign exchange strategist at ING, noted:

‘The binary ‘Deal or No Deal’ Brexit risks makes it understandable as to why this may have been initially perceived as a one-and-done type of reaction – even though the Bank’s official guidance gave nothing to this sort. The Bank’s fairly laissez-faire forward guidance in fact retains an element of policy flexibility.

‘Debates over the timing of the next rate hike might continue to see some small movements in GBP over the near-term. This is just semantics for the broader outlook for GBP. When it comes to BoE policy, the bigger driver tends to be the overall level of tightening priced in over the 2 or 3-year part of the curve – and this remains data, and more importantly, Brexit-dependent.’

Even so, with fresh UK data rather limited at the start of next week the GBP USD exchange rate could struggle to make significant headway.

US Dollar Demand Muted Ahead of Payrolls Data

The ‘Greenback’ came under some pressure, meanwhile, as the Trump administration announced its choice for the next Federal Reserve Chair.

Current Fed governor Jerome Powell is considered to be one of the more dovish of the potential candidates mooted, prompting some concerns that the course of monetary tightening could be slower than previously thought.

However, as analysts at ING commented:

‘Given the strong economy and jobs market, inflation pressures gradually building and Fed officials broadening out the reasons behind hiking – such as financial conditions, asset valuations and financial stability issues – we are still sticking to our view of a December rate hike. This is more than 90% priced in by financial markets with the main risk coming from the potential for an economically damaging government shutdown in the absence of agreement to raise the debt ceiling.
‘Under the leadership of Powell we expect two more 25bp Fed rate hikes in 2018 rather than the three the Fed have currently pencilled in.’

Demand for the US Dollar is likely to remain at least somewhat limited ahead of this afternoon’s raft of US labour market data, which could provoke fresh volatility for the GBP USD exchange rate.

Forecasts point towards a solid rebound in the headline non-farm payrolls figure, following the contraction seen in response to the recent hurricane season.

Signs that the labour market is continuing to tighten should encourage Fed policymakers, keeping the odds of a December interest rate hike high.

Even so, with wage growth expected to lose some momentum the upside potential of the US Dollar could still be limited ahead of the weekend.

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TAGS: Pound Dollar Forecasts