Pound US Dollar (GBP/USD) Exchange Rate Strengthens following Strong Services PMI
(Updated 16:15, 03/11/21) The Pound US Dollar (GBP/USD) exchange rate has managed to climb higher this afternoon, despite the looming policy announcement from the Federal Reserve.
The upside came courtesy of an impressive services PMI from the UK. The finalised report printed 1.1 points higher than the flash estimate, jumping from 55.4 in September to 59.1 in October, which suggests that the service sector recovery is gaining momentum.
Service providers saw a sharp rise in business activity last month thanks to a loosening of pandemic-related restrictions – particularly around international travel – as well as higher immunity and fewer people needing to isolate. As the UK’s service industries account for almost 80% of GDP, the impressive PMI bodes well for the UK economy.
While this strong data may have boosted GBP/USD on its own, the upside has been amplified by the Bank of England’s (BoE) interest rate decision tomorrow. Traders already expected the BoE to hike rates, and evidence of a strong UK economic recovery will only put more fuel on the fire.
Consensus among economists is that the Monetary Policy Committee (MPC) will vote 6-3 against a small rise in interest rates. However, three members of the MPC have hinted at their support for a hike in recent weeks, while two more are known hawks, so a majority vote in favour of raising rates is possible (and, according to CME data, 100% likely).
Following the strong services PMI, GBP bulls seem more confident that we’re heading for a rate hike. As such, GBP/USD has risen by 0.21% today, from $1.36311 to $1.36598, at the time of writing.
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Pound US Dollar (GBP/USD) Exchange Rate Flat as Fed Decision Looms
The Pound US Dollar (GBP/USD) exchange rate has wavered in a narrow range so far today as markets remain hushed ahead of the Federal Reserve’s interest rate decision this evening.
Experts expect the Fed to announce tapering plans, which could have significant effects on global forex and equity markets. As such, investors are rather hesitant this morning.
Pound (GBP) Muted on Brexit Jitters and BoE Rate Hike Bets
The Pound (GBP) has wavered against the US Dollar (USD) so far in today’s session, as the looming Fed decision mutes market activity.
In addition, Brexit concerns and expectations of a Bank of England (BoE) rate hike tomorrow are also keeping the Pound in a narrow range.
Tensions between the UK and the EU are fraught at the moment, after the UK narrowly avoided a trade war with France and negotiations on the Northern Ireland protocol have hit a brick wall. After armed men hijacked and torched a bus in Northern Ireland earlier this week, the gravity of the situation is weighing on GBP.
On the other hand, the BoE convenes tomorrow to vote on monetary policy. According to the CME BoE Watch there is a 100% likelihood of a rate rise from the central bank. These expectations, although refuted by some economists, have supported the Pound in recent weeks and seem to be limiting its downside.
Sterling could also find some support after the UK’s finalised services PMI printed higher than preliminary estimates. The PMI rose from 55.4 in September to 59.1 in October, versus the 58 expected.
However, movement throughout the day could be limited as forex investors will likely prefer to wait for the Fed’s announcement before placing any bullish bets.
US Dollar (USD) Dormant as Markets Await the Fed
Meanwhile, the US Dollar (USD) is also trading sideways ahead of the Fed’s decision.
The Fed has signalled in recent weeks that it plans to begin tapering its huge bond-buying stimulus in mid-November or mid-December, with market consensus being that the former is more likely. Economists expect the American central bank to announce a $15bn reduction in its monthly bond purchases, which currently stand at $120bn.
Investors will also be watching for any clues as to when the Fed could hike rates. If the Fed chooses to taper faster than expected, this could signal a sooner-than-anticipated interest rate rise next year.
As such, USD investors are waiting for the big announcement, which is keeping the ‘Greenback’ fairly flat today.
GBP/USD Exchange Rate Forecast: Markets to Remain Quiet ahead of the Fed?
With all eyes on the Fed decision this evening, GBP/USD may continue to trade in a narrow range for the rest of the day.
That said, there are some US data releases that would normally be fairly high impact, which may cause some movement in the pair. The ADP employment change figures are expected to show that another 400,000 jobs were added to the US economy. Meanwhile, the ISM non-manufacturing PMI looks set to show continued strong growth in the US services sector. These releases may support USD.
However, US factory orders are expected to have stalled in September, so this could offset the earlier positive data.
The Fed decision itself could trigger big swings in USD exchange rates. A tapering announcement may boost the ‘Greenback’, while any hawkish surprises could see it soar. Expect some sharp movements in the forex market over the next few days.