Pound Sterling to US Dollar (GBP/USD) Exchange Rate Slides as UK Manufacturing Hits Lowest Level Since 2013

Sharp UK Manufacturing Decline Drags Down Pound Sterling US Dollar (GBP/USD) Exchange Rate

The Pound Sterling to US Dollar (GBP/USD) exchange rate came under fresh pressure this morning as June’s UK manufacturing PMI fell further into contraction territory.

Confidence in the outlook of the UK economy deteriorated on the back of the data, with the headline index sliding from 49.4 to 48 last month.

With the manufacturing sector falling further into a state of contraction the prospects for the second quarter UK gross domestic product appear less-than-encouraging, weighing down Pound Sterling (GBP).

As James Smith, Developed Markets Economist at ING, commented:

‘The UK manufacturing PMI is at the lowest level for over six years and suggests that the sector will post negative growth through the second quarter. Much of this has to do with the stockpiling frenzy of the first quarter, which saw firms scramble to boost inventory to try and insulate themselves against the possible supply chain disruptions of a ‘no deal’ Brexit.

‘We’d expect this trend to continue as we head into the summer months, and this is the main reason why we expect overall second-quarter growth to come in more or less flat.’

Pound Sterling (GBP) Vulnerable Ahead of UK Services PMI

Further weakness could be in store for GBP exchange rates on Wednesday if the corresponding UK services PMI proves similarly underwhelming.

Although forecasts point towards the index only easing from 51 to 50.6 the potential for a downside surprise appears significant in the wake of the manufacturing sector data.

As the service sector remains the primary growth engine of the UK economy, accounting for more than three quarters of the gross domestic product, any weakness here could weigh heavily on the Pound.

However, if the PMI remains within positive territory or shows any improvement on the month this could offer the GBP/USD exchange rate a solid rallying point.

US-China Progress Boosts US Dollar (USD) Demand

Demand for the US Dollar (USD) picked up at the start of the week, meanwhile, thanks to signs of progress at the G20 summit.

With the US agreeing to hold off on further tariffs on Chinese produce and the two sides reopening formal trade talks the mood of USD exchange rates naturally improved.

As the ongoing trade dispute has already shown signs of constraining US growth this development gave investors cause for confidence, even though the risk of relations souring once again remains.

This helped to offset the impact of last week’s underwhelming data, although the US still appears on course for a weaker second quarter of growth.

US Dollar Exchange Rate Momentum May Falter on Easing US Manufacturing Activity

This afternoon’s ISM manufacturing index could see the US Dollar fall out of favour, however, as investors expect to see another easing in sector activity.

Further evidence of a manufacturing slowdown may expose USD exchange rates to fresh selling pressure, in spite of this latest easing in political anxiety.

Unless the manufacturing sector can demonstrate greater signs of resilience in the face of trade disruption the mood towards the US Dollar looks set to sour.

With the Federal Reserve already on course to cut interest rates in the near future anything short of an improvement in sector growth is likely to drag on the US Dollar, to the benefit of the GBP/USD exchange rate.

Louisa Heath

Contact Louisa Heath