Pound US Dollar (GBP/USD) Exchange Rate Weakens as Service Sector Contracts

Modified: Thursday, 5 January 2023 12:05 BST - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Weakens as Service Sector Contracts

Pound US Dollar (GBP/USD) Exchange Rate Weakens amid Service Sector Contraction

The Pound US Dollar (GBP/USD) exchange rate weakened on Thursday, as the UK’s latest service sector index was revised downward, reflecting a contraction during December.

At the time of writing, GBP/USD traded at around US$1.2016, a decline of roughly 0.3% from Thursday’s morning rates.

Pound (GBP) Weakens as Service Sector Contracts

The Pound (GBP) weakened on Thursday, as the UK’s service sector index for December was revised down to 49.9. As such, it showed that the sector remained in contraction territory as opposed to the anticipate return to flat levels.

Inflation was highlighted as a key pressure on the sector, with the costs of supplies increasing. Furthermore, the knock on effect the downturn was having on the wider UK economy was demonstrated by an impact on the labour market.

Dr John Glen, Chief Economist at the Chartered Institute of Procurement and Supply (CIPS) explored this sentiment further. He stated: ‘This shrinkage has also started to impact on job creation levels which stalled for the first time in almost two years. With another drop in orders, especially from domestic customers, businesses were cautious about building more operating capacity which in turn will affect job seekers.’

Further weighing on Sterling during Thursday’s session was continued industrial action. Fresh transportation strikes began, while environmental workers announced their first strike in history. With the UK government looking to push a minimum service law, negotiations may become less likely which could prompt further anxieties over the UK economy.

US Dollar (USD) Directionless amid Shifting Market Mood

The US Dollar (USD) lacked direction on Thursday, as a shifting market mood served to weigh on the safe-haven ‘Greenback’ and counteract modest gains brought by a gently hawkish set of meeting minutes from the Federal Open Market Committee (FOMC).

As such, the hawkish lilt to the minutes served to cushion the US Dollar from significant risk based losses on Thursday. The minutes showed that the Fed remained committed to curtailing inflation, leaving room for further tightening.

The minutes stated: ‘A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee's resolve to achieve its price stability goal. No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.’

With rate hikes expected to continue in 2023 until inflation is adequately controller, investors remained favourable towards the US Dollar despite the risk of political instability. At the time of writing, the US House of Representatives has still not elected a new leader, after a series of failed votes.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: US Data Takes Spotlight

Looking ahead for the US Dollar, after Thursday afternoon’s expected continuation in jobless claims, Friday brings several key data releases which could drive the ‘Greenback’.

Firstly, December’s non farm payrolls data is due to Print, with a drop from 263000 to 200000 expected. This fall in created jobs may wound the US Dollar, but is accompanied by the expectation of little change to the unemployment rate. As such, the figures may point to a tight labour market and support the ‘Greenback’, should they print as forecast.

This is then followed by the ISM non-manufacturing PMI index for December, which is forecast to show a slow down from 56.5 to 55. If this prints as forecast, the ‘Greenback’ may be further weakened by fears that the US economy is heading towards a recession.

Friday is then capped by a litany of speeches from Federal Reserve officials. With the Federal Open Market Committee (FOMC) minutes pointing to a hawkish outlook from the Fed, if these speeches reiterate the central bank’s desire to curb inflation, USD may be boosted by further rate hike bets.

For the Pound, trading conditions remain thin through to the end of the week. With these conditions, investors may turn their focus towards domestic headlines within the UK. Industrial action is scheduled to continue for transportation workers, and other workers in different sectors are beginning to announce fresh walkouts.

With a solution seeming beyond the pale, the continued stress the walkouts are having on the UK economy may weaken Sterling.

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TAGS: Pound Dollar Forecasts