British Pound to US Dollar Exchange Rate Slumps as US PMIs Impress Investors

Anticipation for Thursday’s key Bank of England (BoE) policy decision has been unable to keep the British Pound to US Dollar (GBP/USD) exchange rate buoyant so far this week, as UK data weighs on Sterling while the US Dollar recovers from its recent lows.

Despite being bolstered by Bank of England speculation last week, GBP/USD was unable to sustain any gains then either. GBP/USD opened last week at the level of 1.4155 and closed just slightly lower, at 1.4122 after the US Dollar began to recover on Friday.

While Bank of England Governor Mark Carney hinted last week that the bank may need to refocus on tackling domestic inflation, which surged over the last year, higher BoE interest rate hike bets were somewhat short-lived.

Investors had been speculating that if Britain’s economy remained resilient amid the Brexit process, the Bank of England would be more likely to tighten UK monetary policy again.

However, January’s UK PMIs from Markit all fell short of expectations, indicating that Britain’s economy may not be as sturdy as markets had hoped.

Monday’s UK services PMI was forecast to have improved slightly from 54.2 to 54.3, but instead fell to just 53.0. This marked the worst monthly print for Britain’s biggest sector since September 2016.

It rounded off a trio of underwhelming UK PMIs, as manufacturing and construction also disappointed investors last week. Overall, January’s UK composite PMI slowed from 54.9 to 53.5.

With markets highly uncertain about what tone the BoE could now take in this week’s policy decision, Sterling was weak on Monday. It was pressured even further by the latest Brexit uncertainties.

According to reports, the UK government has asserted that Britain will be leaving the EU customs union following Brexit. On Monday, this prompted responses from the EU officials that there would be barriers to trade in goods and services if Britain leaves the customs union.

Sterling’s Monday weakness made it much easier for the US Dollar to advance, especially as the latest US data has continued to beat expectations.

Monday’s American session saw the publication of ISM’s January non-manufacturing PMI, which was forecast to have improved from 55.9 to 56.5 – but instead jumped from a revised 56.0 to an impressive 59.9.

This was the highest figure for the print in over 12 years and further boosted Federal Reserve interest rate hike bets, following last Friday’s impressive US wage data and Non-Farm Payroll results from January.

However, the Pound to US Dollar exchange rate’s losses may be limited, as Pound investors will be awaiting Thursday’s Bank of England decision before making new major moves on the currency.

The Bank of England is not expected to make any changes to UK monetary policy in its February decision, but any changes in the bank’s tone could have a notable impact on Pound movement towards the end of the week.

If the bank indicates that it will tackle UK inflation, BoE rate hike bets will rise and the Pound could recover some of its losses against the US Dollar.

On the other hand, a more cautious tone from the BoE would cause rate hike bets to fall and the Pound to weaken.

Investors will also be taking note of December trade data this week, with US trade data due Tuesday and UK trade data due on Friday alongside UK industrial and manufacturing production stats.