The Pound to US Dollar exchange rate is currently trading close to a seven-week high after rallying over two cents in response to a triplet of better-than-anticipated UK PMI reports.
GBP/USD Stutters on Fed Rate Hike Bets
Sterling struggled to make any inroads against the ‘Greenback’ at the start of last week’s session due to growing speculation that the Federal Reserve may opt to raise interest rates this September. Recent statements from Fed officials, including Chairwoman Janet Yellen, suggested that the sturdy US labour market and mild inflationary pressures would warrant a rate increase at some point in the future.
However, towards the end of the week demand for the Pound picked up tremendously. Rebounding from a three-year low of 48.3, the UK manufacturing PMI printed at 53.3. The five-point jump was the joint-largest monthly increase witnessed in the sector during the index’s 20-year history. ‘Cable’ leapt higher by over 150 pips in response to the upbeat figure, which was seen to pour cold water on bets that a ‘Brexit’ related dip in economic output would prompt the Bank of England to loosen monetary policy again in 2016.
US NFP Report Disappoints
Friday’s construction report also impressed, printing at 49.2 compared to forecasts of 46.5. Although the building sector remained in the red (below the 50.0 mark that separates growth from contraction) analysts were minded to send Sterling higher because the index was significantly better than they had penciled in.
During the afternoon a highly anticipated US non-farm payrolls report showed that job creation slowed from 275,000 to 151,000 in August. The disappointing number caused investors to cut back on September rate hike bets but did not have a material impact on forecasts of a rate rise in December.
Week Ahead
The Pound to US Dollar exchange rate rose to a seven-week high on Monday morning in response to a massive outperformance in August’s UK service sector PMI. The report showed that Britain’s dominant services industry, which accounts for over 70% of total GDP output, rebounded from a seven-year low of 47.4 to 52.9 in what was the largest monthly jump in the 20-year history of the report.
The sanguine reading appears to suggest that Britain will probably avoid sliding into recession this year, which should be enough to persuade policymakers at the BoE to refrain from further stimulus. It also means that GBP/USD could carve out a higher exchange rate over the next few months – so long as the Fed does not hike interest rates anytime soon.
Sterling could remain close to 1.33 against the US Dollar for most of this week’s session as long as there are no surprises from the economic calendar. The most important events to look out for are Tuesday’s US services sector ISM report and comments from central bank officials, Wednesday’s UK industrial production print and Friday’s BoE consumer inflation expectations report.