Pound US Dollar (GBP/USD) Exchange Rate Hits 4-Day High Despite UK PMI Crash

Slump in UK PMIs Fails to Prevent Pound US Dollar (GBP/USD) Exchange Rate Recovery

A sharp downturn in March’s UK manufacturing and services PMIs was not enough to keep the Pound Sterling to US Dollar (GBP/USD) exchange rate from recovering ground today.

Even so, the outlook for the UK economy continued to deteriorate as both PMIs slumped into a state of contraction.

After the government announced further restrictions aimed at containing the spread of Covid-19 last night the risk of economic activity grinding to a halt picked up further.

Investors see high odds of a downward revision to the initial PMI readings once the remainder of the month’s data is accounted for, potential pushing the indexes to a deeper low.

Nevertheless, after its recent run of weakness, the decline of Pound Sterling (GBP) appeared to bottom out, in spite of the historically soft nature of the PMIs.

Hopes of Imminent US Fiscal Support Limits US Dollar Strength

With markets still hopeful that the US Senate could approve a major tranche of fiscal stimulus the upside potential of the US Dollar (USD) weakened.

While the Covid-19 crisis still looks set to push the global economy into a deep recession in the first half of 2020 USD exchange rates failed to find any fresh gains this morning.

As the Federal Reserve pledged asset purchases with no limit in an attempt to shore up markets on Monday the general sense of market risk aversion showed signs of easing.

However, if the US government is unable to follow through with the fiscal stimulus markets expect this could trigger a fresh bout of investor anxiety, to the benefit of the safe-haven US Dollar.

Weak PMIs Set to Dent US Dollar Demand

Confidence in the underlying health of the US economy may take a fresh blow, meanwhile, if March’s flash PMIs weaken as expected.

Evidence of the US economy losing momentum in the face of the global Covid-19 disruption could put a dampener on USD exchange rates.

Unless the world’s largest economy can demonstrate signs of resilience fears of a significant global recession are likely to pick up further.

Even if the US appears on track to slow in the first quarter, though, the GBP/USD exchange rate may struggle to capitalise on this.

As long as market confidence remains muted as a result of the pandemic and ensuing uncertainty this may limit the potential for US Dollar selling in the near term.

Uneventful BoE Meeting May Still Trigger GBP Exchange Rate Volatility

After delivering two emergency interest rate cuts in the space of a fortnight the Bank of England (BoE) looks unlikely to announce further policy action at its official March meeting.

Nevertheless, the Pound could still see volatility in the wake of the meeting as markets weigh up the current outlook of policymakers.

Signs that further monetary loosening may be on the horizon could drag the Pound lower across the board once again, with investors wary of the potential for negative interest rates.

If the BoE signals an intention to leave policy on hold for the time being, though, this could encourage the GBP/USD exchange rate to climb further away from its recent lows.

Louisa Heath

Contact Louisa Heath