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Pound US Dollar (GBP/USD) Exchange Rate Slides on Unexpectedly Weak UK Services PMI

February 5, 2019 - Written by Frank Davies

Softening UK Service Sector Drives Pound Sterling US Dollar (GBP/USD) Exchange Rate Lower

As the UK service sector fell into a state of near-stagnation the Pound Sterling to US Dollar (GBP/USD) exchange rate slumped.

Following on the heels of underwhelming manufacturing and construction PMIs the services PMI dropped from 51.4 to just 50.1 in January, disappointing forecasts.

All in all this suggests that the UK economy started 2019 on a weaker footing, raising concerns that the first quarter gross domestic product could see a further slowdown.

As Chris Williamson, Chief Business Economist at IHS Markit, commented:

‘Service sector growth ground almost to a halt in January, matching similar disappointing news in the manufacturing and construction sectors. The last three months have seen the economy slip into its weakest growth spell for six years, and indicate that GDP likely stagnated at the start of 2019 after eking out modest growth of just 0.1% in the fourth quarter.’

With worries over Brexit weighing heavily on the economic outlook this left the Pound trending lower across the board on Tuesday.

Disappointing ISM Non-Manufacturing Index Fails to Dent US Dollar (USD) Exchange Rates

Although the ISM non-manufacturing composite index fell short of forecast in January, easing from 58 to 56.7, this failed to put any particular dampener on the US Dollar.

As the index remains in a solid state of growth the negative impact on USD exchange rates proved limited, with markets still confident in the health of the US economy.

With the recent government shutdown having had a limited impact on recent US data investors were encouraged to pile into the US Dollar, particularly in the face of market risk aversion.

Lingering worries over the US-China trade spat and the slowing global economy also helped to shore up the safe-haven US Dollar, in spite of persistent political tensions.

US Dollar (USD) Exchange Rates Vulnerable to Federal Reserve Commentary

Commentary from Federal Reserve Chair Jerome Powell could put pressure on the US Dollar, however, on Wednesday night.

After the Fed took a surprisingly cautious turn at its January policy meeting the odds of a 2019 interest rate hike have diminished.

If Powell continues to signal a willingness to leave interest rates on hold in the months ahead the GBP/USD exchange rate is likely to benefit.

With the US central bank looking set to remain on hold for longer the upside potential of the US Dollar may prove limited.

Another solid week of jobless claims figures, though, could see USD exchange rates gain a fresh rallying point on Thursday.

Bank of England Dovishness Forecast to Weigh on GBP Exchange Rates

The major source of volatility for the GBP/USD exchange rate this week, however, will be the Bank of England (BoE) policy announcement.

Even though the BoE is also expected to leave interest rates on hold ahead of the Brexit deadline the meeting could still weigh heavily on the Pound.

Any signs of increased dovishness within the meeting minutes or the latest quarterly Inflation Report may leave the Pound in a fresh slump on Thursday, especially if there are any downward revisions to the Bank’s forecasts.

If the BoE continues to move away from a hawkish policy outlook the appeal of the Pound is unlikely to improve as worries over the domestic outlook persist.

Without any tangible progress towards a final Brexit deal, meanwhile, the GBP/USD exchange rate could struggle to return to a stronger footing.
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