Pound Sterling US Dollar (GBP/USD) Exchange Rate Slides as UK Manufacturing PMI Softens

Pound Sterling US Dollar (GBP/USD) Exchange Rate Trends Lower as UK Manufacturing Loses Momentum

As the UK manufacturing PMI eased to a four-month low of 52 in February this left the Pound Sterling to US Dollar (GBP/USD) exchange rate on a weaker footing.

Although forecasts had pointed towards this decline in sector activity investors were still encouraged to sell out of Pound Sterling (GBP) this morning.

Following on from January’s underwhelming set of PMIs this weaker showing raises concerns over the likely strength of the first quarter gross domestic product, suggesting a further loss of momentum.

While business stockpiling continued apace the underlying details of the PMI were far from positive, as Rob Dobson, Director at IHS Markit, commented:

‘The current elevated degree of uncertainty is also having knock-on effects for business confidence and employment, with optimism at its lowest ebb in the survey’s history and the rate of job losses accelerating to a six-year high.’

US Dollar (USD) Exchange Rates to Strengthen on Signs of Steady US Inflation

The GBP/USD exchange rate could lose further ground this afternoon if December’s US personal consumption expenditure core reading proves steady as forecast.

Investors anticipate the headline index holding steady at 1.9% on the year, remaining just short of the Federal Reserve’s 2% inflation forecast.

As this measure remains the Fed’s preferred measure of inflation a solid showing here could diminish the odds of policymakers adopting a cautious outlook in the months ahead.

Unless the index accelerates to 2% or higher, though, the case for an imminent return to the Fed’s monetary tightening cycle appears limited.

An improved monthly reading could offer an additional boost to the US Dollar (USD), meanwhile.

Weaker US Manufacturing Growth to Limit US Dollar (USD) Upside

On the other hand, USD exchange rates may come under pressure on the back of February’s ISM manufacturing index.

Forecasts point towards the index slowing from 56.6 to 56.0 on the month, demonstrating the negative impact of the Trump administration’s protectionist approach to trade.

Even though a reading of 56.0 would still indicate solid growth any signs of a slowdown could weigh heavily on the US Dollar.

With the global outlook souring the strength of the US economy looks set to wane further in the months ahead, limiting the upside potential of USD exchange rates.

GBP/USD Exchange Rate Vulnerable to UK Service Sector Slowdown

Demand for Pound Sterling may diminish further if February’s UK construction and services PMIs show a decline on the month.

Signs of a wider slowdown in the UK economy could push the GBP/USD exchange rate further away from its recent multi-month highs.

Any weakness within the service sector could weigh particularly heavily on the Pound, given that the sector still accounts for more than three quarters of the UK GDP.

If the services PMI slips into contraction territory, falling below the neutral baseline of 50, GBP exchange rates could see a sharp slump across the board.

Without evidence of greater resilience within the UK economy the GBP/USD exchange rate looks exposed to continued selling pressure in the days ahead.

Louisa Heath

Contact Louisa Heath