The Pound to US Dollar exchange rate slid through longstanding technical and psychological support at 1.25 at the beginning of last week’s session as UK data disappointed.
UK Private Sector Shows Signs of Consumer Slowdown
A drop in demand for consumer goods drove the UK manufacturing PMI down to a four-month low of 54.2 last week, which weighed on the Sterling. Over in the States, the ISM factory output gauge printed markedly higher at 57.2.
The UK construction PMI also disappointed, coming in at 52.2 as business activity and housing construction projects softened. ‘Cable’ lost out on around half a cent, falling towards 1.24, as traders rushed into the safe haven US Dollar ahead of a meeting between US President Donald Trump and Chinese President Xi Jinping. Investors feared that Trump’s outspoken views on China (he has labelled the Chinese government a currency manipulator in the past) could have had negative consequences for global trade.
UK Service Sector Print Re-energises Sterling
On Wednesday the UK service sector PMI printed at 55.0, smashing forecasts of 53.5 and breathing life back into the UK currency. GBP/USD rallied by around half a cent on the back of the report, which accounts for over 70% of British economic output. In the US, sentiment remained neutral following an unremarkable Federal Reserve minutes report, which did little to alter the consensus that US rates will rise by a further 50 basis points in 2017.
However, Sterling’s week took another turn for the worse on Friday when a slew of UK data points printed negatively. Industrial production came in at -0.7%, manufacturing activity contracted -0.1%, the British trade deficit widened to a five-month high of £12.5 billion and data suggested that UK growth slowed from 0.7% to 0.5% in the first quarter of 2017. Additionally, Bank of England Governor Mark Carney noted that the threat of a hard Brexit remains a key concern, suggesting the central bank is unlikely to tighten monetary policy anytime soon.
Across the pond, US unemployment dropped to a nine-year low of 4.5%, which made up for a 10-month low US non-farm payrolls report of 98,000.
Week Ahead
Last week’s US-China summit between Trump and Xi Jinping appeared to go smoothly, however, risk sentiment was dealt an unexpected blow by an escalation of the conflict in Syria. A US air strike in retaliation to the suspected use of chemical weapons by the Syrian government raised the threat of geopolitical unrest in the region – and this could drive investors in flights of safety towards the safe haven US Dollar.
Otherwise, the economic calendar could throw up some volatility around UK CPI and jobless reports as well as US inflation figures.
If the UK consumer price index remains at 2.3% as expected, or rises further, then we could see a little spike in demand for the Pound as bullish traders bet on higher UK interest rates. A surprise uptick in UK wages could also boost Sterling, while the currency could sustain losses if wage growth surprises to the downside.
US inflation is tipped to remain above target at 2.6%. Although this would mark a slight deceleration from the previous month’s score of 2.7%, it would certainly leave the door open to additional Fed rate hikes later in the year.