Pound US Dollar (GBP/USD) Exchange Rate Shakes Off Disappointing UK Government Borrowing Data

Widened UK Budget Deficit Unable to Prevent Pound US Dollar (GBP/USD) Exchange Rate Gains

A sharp uptick in UK government borrowing failed to prevent the Pound Sterling to US Dollar (GBP/USD) exchange rate gaining fresh ground this morning.

The public sector net borrowing figure swelled to a deficit of -10.5 billion in October, likely buoyed by intensified preparation ahead of the former Brexit deadline.

While this represented the highest level of October borrowing in five years the negative impact on Pound Sterling (GBP) was ultimately limited.

As this widened deficit is unlikely to deter political parties from their spending pledges focus largely remained on developments in the unfolding election campaign, keeping GBP exchange rates on a steady footing.

USD Exchange Rates Fail to Benefit from Fed’s Resolve to Leave Interest Rates on Hold

Support for the US Dollar (USD), meanwhile, proved muted in the wake of the publication of the Federal Open Market Committee’s (FOMC) October meeting minutes.

The tone of the minutes proved largely positive, with policymakers agreeing to leave interest rates on hold until they see a ‘material’ change in the current economic outlook.

Even so, as the central bank acknowledged that downside risks to the economic outlook are still elevated this was not enough to give USD exchange rates any particular boost.

Increasing uncertainty surrounding the likelihood of the US and China agreeing a trade deal before the end of the year also put a dampener on the US Dollar, fuelling concerns over the future health of the US economy.

Rising Manufacturing Sector Activity May Boost US Dollar Demand

The mood towards the US Dollar could improve this afternoon, however, as forecasts point towards a stronger showing from the Philadelphia Fed manufacturing index.

If the index strengthens from 5.6 to 7 as anticipated this could encourage a greater sense of confidence in the resilience of the US manufacturing sector.

Evidence that manufacturing activity recovered some of its lost momentum in November may bolster the odds of a stronger fourth quarter gross domestic product reading, to the benefit of USD exchange rates.

Fresh comments from Fed policymakers may also offer the US Dollar a boost against its rivals, provided that they reiterate a willingness to keep monetary policy on hold in the coming months.

Resilient UK Services PMI Forecast to Shore up GBP/USD Exchange Rate

Even so, the GBP/USD exchange rate may find fresh traction ahead of the weekend if the UK services PMI demonstrates growth in November.

After the stagnation seen in October investors are hoping to see the PMI pick up from 50.0 to 50.2, signalling renewed growth within the sector.

Although such a reading would still signal a relatively lacklustre level of activity any evidence of renewed strength within the crucial services sector could boost confidence in the outlook of the UK economy.

While the corresponding manufacturing PMI looks set to remain in contraction territory this may not drag on the GBP/USD exchange rate, provided that the service sector delivers a positive result.

Louisa Heath

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