Unexpected UK Manufacturing Uptick Boosts Pound Sterling (GBP) Exchange Rates
October’s UK manufacturing PMI surprised to the upside on Wednesday, offering fresh support to Pound Sterling (GBP) exchange rates.
The index strengthened from 56.0 to 56.3, suggesting that the sector is continuing to experience solid growth in spite of persistent uncertainties relating to Brexit.
If the corresponding construction and services PMIs also prove positive, this would encourage hopes that the UK economy started the fourth quarter on a stronger footing.
Positive comments from chief EU negotiator Michel Barnier also helped to bolster demand for the Pound this week, as he noted that he is prepared to ‘speed up’ Brexit talks.
So long as markets see greater odds of negotiations proceeding to their second phase before the end of the year, Sterling may see a more limited degree of downside vulnerability.
GBP/USD Exchange Rate Forecast to Gain Ground on BoE Rate Hike
The Pound has been generally supported in recent days thanks to market expectations that the Bank of England (BoE) will raise interest rates at its November policy meeting.
As a number of policymakers have signalled hawkish intent, interest rates look set to finally rise from their current record low of 0.25%.
However, with the impact of a 25bpt hike already largely priced into the Pound, its upside potential is relatively narrow unless policymakers prove more hawkish than anticipated.
The case for an imminent rate hike is also still far from certain, given the sluggish nature of wage growth and signs that rising inflation is already squeezing consumers.
If the Monetary Policy Committee (MPC) does not opt to raise interest rates at this juncture this could see GBP exchange rates slump sharply.
Fed Leadership Jitters Weigh on USD/GBP Exchange Rate
In another positive sign for the US economy, the annualised third quarter gross domestic product figure proved stronger than forecast, giving investors further cause for confidence.
This further cemented bets that the Federal Reserve will opt to raise interest rates at its December policy meeting, even though inflation is still somewhat weaker than policymakers might like.
Even so, the mood towards the ‘Greenback’ turned a little more cautious as anticipation continued to build over the Trump administration’s likely choice for the next Fed Chair.
If Trump puts forward a more dovish candidate this could weigh on USD exchange rates, reducing the likelihood of the central bank pursuing a faster pace of monetary tightening over the coming months.
Friday’s non-farm payrolls report may offer the US Dollar a fresh boost, though, if the US labour market shows further signs of tightening.
Robust Eurozone Data Supports EUR/USD Outlook
Although Euro (EUR) exchange rates plunged sharply on news that Catalonia had made a unilateral declaration of independence on Friday, this bearishness did not last for long.
Markets are still confident that the region will not be successful in breaking away from Spain, with a lack of international recognition leaving Catalonia distinctly isolated.
This helped the Euro return to a stronger footing, particularly as the Eurozone unemployment rate fell to a fresh multi-year low of 8.9% in September.
Coupled with stronger-than-expected third quarter gross domestic product data, this suggests that the currency union remains in a robust state of health, in spite of political uncertainties.
If the German labour market shows further signs of tightening in October this could boost EUR exchange rates ahead of the weekend.
However, as the European Central Bank (ECB) still looks set to maintain a dovish bias for the foreseeable future, the upside potential of the Euro remains somewhat limited.