The Pound to US Dollar exchange rate has fallen by around 150 pips over the last week, striking a fortnightly low due to soft UK private sector data, softened Bank of England rate hike bets and a sturdy US labour market report.
Downbeat UK PMIs Send GBP USD Exhange Rate Lower
A stuttering UK manufacturing PMI score of 54.3, down from 56.3 previously, set the tone for June’s private sector results. All three PMIs slowed by more-than-anticipated, piling pressure on the Pound.
The construction report cooled from 56.0 to 54.8, while the dominant service sector, which accounts for over 70% of UK GDP, dipped from 53.8 to a four-month low of 53.4, with business optimism shrinking to its lowest level since last year’s EU referendum.
It was generally believed that the poor PMI scores were, at least partly, influenced by the added uncertainty of the snap election and the beginning of the official Brexit negotiations, and this conviction appeared to prevent GBP/USD suffering from more severe losses.
Fed Minutes Provide Rate Hike Doubt
The Pound was also spared steeper declines by a mildly dovish Federal Reserve minutes report, which revealed that some policymakers were concerned about subdued inflation.
While some officials voiced doubts about the outlook for at least one further rate hike in 2017, others felt that the recent ecostat slowdown was merely a blip that would soon pass.
The Fed hawks were somewhat justified in their optimism on Friday when June’s US non-farm payroll report printed at 222,000, smashing forecasts of 178,000. The upbeat report was seen to bolster expectations of another Fed rate hike before the year is out.
GBP USD Week Ahead
GBP/USD got off to a sticky start this week, sliding to a fortnightly low on Tuesday when the Bank of England deputy governor disappointed market expectations of hawkish monetary policy commentary.
Instead, the BoE man spoke of global trade dynamics, and the potential for the UK economy to weaken as a result of Brexit. Analysts interpreted the speech on trade as a signal that Broadbent does not intend to vote for higher rates next time out. This would likely lead to just three votes for higher rates and therefore see rates left on hold.
The main UK event to look out for this week is Wednesday’s UK unemployment report, which is tipped to see joblessness remain at multi-decade lows. However, Sterling could run into trouble if the wage growth figure shrinks from 2.1% to 1.8% as expected.
In terms of the US Dollar, demand could be buffeted by Fed Chairwoman Janet Yellen’s testimonies to Congress and the Senate. Any hawkish statements could drive the ‘Greenback’ higher, while any talk of holding rates for longer could weigh.
The US consumer price index print on Friday could also impact GBP/USD. Traders are primed for inflation to drop from 1.9% to 1.7%, which would probably provide a little bit of selling pressure as hike bets recede.