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Pound US Dollar (GBP/USD) Exchange Rate Recovers After UK Construction Sector Slump

June 4, 2019 - Written by Frank Davies

UK Construction Sector Contraction Fails to Drag Down Pound Sterling US Dollar (GBP/USD) Exchange Rate

A surprise contraction in the UK construction PMI was not enough to keep the Pound Sterling to US Dollar (GBP/USD) exchange rate on a downtrend for long on Tuesday.

Although weakening business confidence saw a decline in workload within the sector this deterioration only had a limited impact on demand for the Pound.

As the construction sector only accounts for a relatively minor fraction of UK economic activity investors were quick to shrug off the disappointing showing.

Even so, coupled with Monday’s weak manufacturing PMI this still points towards the UK economy losing further momentum in the second quarter.

Weaker US Factory Orders Limit US Dollar (USD) Demand

April’s US factory orders data put a dampener on the US Dollar, meanwhile, as output slumped -1% on the month.

This offered fresh evidence of the underlying weakness of the US manufacturing sector, suggesting that the ongoing escalation in trade tensions is weighing on the domestic economy.

With markets increasingly betting on the prospect of the Federal Reserve cutting interest rates before the end of the year, in response to trade tensions, USD exchange rates came under pressure.

Although market risk appetite remains limited thanks to the prospect of imminent US tariffs on Mexican imports and a lack of progress in US-China trade talks this was not enough to boost the US Dollar.

GBP/USD Exchange Rate Vulnerable to UK Service Sector Contraction

Confidence in the Pound could see a significant deterioration if May’s UK services PMI also falls into a state of contraction, however.

With the service sector still accounting for more than three quarters of economic activity within the UK a decline here would raise the risk of growth stalling in the second quarter.

Evidence that a lack of Brexit clarity is dragging on the UK economy would give investors fresh incentive to sell out of the Pound on Wednesday, given that no end to the uncertainty is in sight.

On the other hand, if the services PMI clocks in at a modest 50.6 as forecast, showing minimal expansion on the month, this could encourage the GBP/USD exchange rate to extend its gains further.

Steady ISM Non-Manufacturing Index to Support US Dollar (USD) Exchange Rates

As forecasts point towards a steady reading from the latest ISM non-manufacturing composite index this may offer the US Dollar a fresh rallying point.

Another month of solid growth in the US service sector would go some way towards balancing out the recent spate of underwhelming manufacturing data.

However, if the index falters this could encourage speculation that the Fed will have to cut interest rates in order to cushion the US economy from the impact of the Trump administration’s ongoing trade disputes.

Even so, any renewed deterioration in global market sentiment could still see the US Dollar benefit from an increase in safe-haven demand.
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