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Pound Australian Dollar (GBP/AUD) Exchange Rate Loses Ground as UK Manufacturing PMI Slumps

February 1, 2019 - Written by Tim Boyer

UK Manufacturing Slowdown Weighs on Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate

An unexpectedly weak UK manufacturing PMI saw the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate come under fresh pressure on Friday.

Demand for the Pound diminished in the wake of the manufacturing PMI, which fell short of forecast to soften from 54.2 to 52.8 in January.

Although businesses continued to stockpile in anticipation of potential Brexit disruption this was not enough to outweigh the persistent weakness of manufacturing output and jobs growth.

This weaker showing does not bode well for the outlook of the UK economy at the start of 2019, with a further loss of momentum looking inevitable in the first quarter of the year.

As Howard Archer, Chief Economic Advisor at the EY ITEM Club, commented:

‘A weaker January purchasing managers survey points to the manufacturing sector struggling at the start of 2019 amid a lacklustre domestic economy, a less robust global economic environment and heightened Brexit uncertainties. The survey fuels our belief that GDP growth will likely be limited to 0.2-0.3% quarter-on-quarter in the first quarter of 2019.’

Contracting Chinese Manufacturing Sector Limits Australian Dollar (AUD) Exchange Rate Support

Even so, the Australian Dollar struggled to capitalise on the relative weakness of the Pound ahead of the weekend.

Confidence in the antipodean currency remained muted thanks to the disappointing nature of the latest Chinese data.

As China’s manufacturing sector continued to contract in the first month of 2019 this fuelled worries over the outlook of the global economy.

This weighed heavily on the risk-sensitive Australian Dollar, especially as January’s Australian manufacturing PMI also showed signs of a slowdown.

With the fourth quarter Australian producer price index data pointing towards a weaker level of inflationary pressure AUD exchange rates failed to find much traction on Friday morning.

Australian Dollar (AUD) Exchange Rates Vulnerable Ahead of US Jobs Data

The mood towards the Australian Dollar could sour further on Friday afternoon, however, with the release of the US non-farm payrolls report.

Fresh signs of a tightening US labour market may put additional pressure on the Australian Dollar, even though the odds of an imminent Federal Reserve interest rate hike have continued to fade.

If hopes of a resolution to the US-China trade dispute pick up, though, this could encourage AUD exchange rates to gain some ground across the board.

Evidence that the recent US government shutdown negatively impacted the economy may also give the Australian Dollar cause for confidence in the short term.

Slowing UK Services PMI Forecast to Weigh on Pound Sterling (GBP) Exchange Rates

Further weakness could be in store for the Pound next week if January’s UK services PMI also demonstrates a slowdown in sector growth.

While forecasts point towards a modest uptick in the headline index, from 51.2 to 51.6, this looks vulnerable to a downside surprise.

Any indication that the service sector is also feeling the increasing pressure from Brexit-based uncertainty could easily drive the GBP/AUD exchange rate into a fresh slump.

Unless there is evidence that sector activity is picking up in spite of the fast-approaching March Brexit deadline the Pound looks vulnerable to further losses in the days ahead.
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