GBP/USD Exchange Rate Slumps on Disappointing UK Construction Stats

January 3, 2018 - Written by Tim Boyer

STORY LINK GBP/USD Exchange Rate Slumps on Disappointing UK Construction Stats

On Tuesday, the Pound to US Dollar exchange rate saw a minor improvement from the start of trading.

GBP/USD opened in the region of 1.3511, later closing daily trading higher in the region of 1.3594.

Construction Sector Slowdown Leads to GBP/USD Exchange Rate Decline

The Pound to US Dollar rate has been weakened by domestic data today, which has lowered trader confidence.

The GBP/USD exchange rate fell after the December construction PMI result was announced; this showed an unexpected slowdown during the month.

Commenting on the results, IHS Markit Associate Director Tim Moore said;

‘The UK construction sector achieved a moderate expansion of business activity at the end of 2017, although the recovery remained uneven and slowed overall since November.

Construction companies indicated that another strong contribution from house building helped to offset subdued civil engineering activity and reduced volumes of commercial work.

The slowdown doesn’t put the sector in danger of contraction, but still unsettled traders who were already alarmed by Tuesday’s slowing manufacturing PMI reading.

USD/GBP Exchange Rate Rises after Reports of Growing Manufacturing Sector

In an opposite situation to the UK, the US Dollar has risen today because of forecast-beating PMI data.

The ISM manufacturing PMI for December showed growth during the month, instead of a slowdown as forecast.

Andrew Hunter of Capital Economics put a positive slant on the manufacturing activity measure, stating;

‘The improvement was fairly broad based, with the production and supplier deliveries components both rising and the forward-looking new orders index seeing a particularly encouraging leap.

Admittedly, the employment index fell back to 57.0 points from 59.7, but it is still consistent with manufacturing payrolls continuing to expand at a healthy pace.

The upshot is that this supports our above-consensus forecast that overall non-farm payrolls increased by 210,000 in December’.

The non-farm payrolls reading is a high-impact indication of how many new jobs have been added on the month (excluding agricultural positions).

If Capital Economics’ forecast is accurate on Friday, the US Dollar could make major gains against the Pound.

Other US news hasn’t been so supportive during the first week of 2018.

US President Donald Trump has made a bombastic return to Twitter, weighing in on the Iranian protests, the ownership of Jerusalem and the North Korean nuclear crisis.

On the last issue, Trump has been predictably alarming, declaring;

‘North Korean Leader Kim Jong Un just stated that the “Nuclear Button is on his desk at all times.”

Will someone from his depleted and food starved regime please inform him that I too have a Nuclear Button, but it is a much bigger & more powerful one than his, and my Button works!’

This has done little to raise hopes of a peaceful resolution to the ongoing war of words between the US and North Korea, despite the latter nation’s reopening of a ‘hotline’ with South Korea.

Pound to US Dollar Forecast: GBP/USD Exchange Rate Rise possible on Services PMI

Following the recent manufacturing and construction PMI data releases, the Pound could be further influenced by Thursday morning’s services PMI reading.

This is the most important of the three PMI measures, as it covers economic activity in areas such as financial services, tourism and retailing.

Current estimates are for growth in the services score, which could greatly raise confidence in the Pound.

UK retailers have recently been reporting better-than-expected sales figures for December, so it is entirely possible that forecasts for sector growth will be proven accurate, if not exceeded.

The US Dollar could be affected more immediately, after this evening’s Federal Open Market Committee (FOMC) minutes come out.

The minutes will cover the Federal Reserve’s policy meeting in December, which resulted in an interest rate hike.

The key issue for USD traders is whether the Fed will raise US interest rates three or four times in 2018; if the minutes suggest the latter number then the US Dollar could rise sharply.

Elsewhere, Friday afternoon could bring high USD/GBP volatility if the non-farm payrolls reading rises above forecasts.

The figure typically misses or exceeds estimates by a large degree, so a US Dollar to Pound rally on a forecast-beating result is a definite possibility.

The other major US news on Friday will be ISM’s non-manufacturing PMI, which is tipped to show growth as with the manufacturing variant.

This might close off the week on a high note for US Dollar traders, who could buy into the US Dollar on expectations of a vintage year for the US economy.

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TAGS: Pound Dollar Forecasts