The pound trended steadily lower versus the US dollar across the week. The pair started the week at US$1.2944. But it lost ground every day before closing the week at US$1.2772, below the key US$1.28 level. The pound US dollar exchange rate shed 1.2% through the week, paring gains from the previous week.
Let’s take a look at the factors that have been driving the pound US dollar exchange rate across the week.
Pound: Macro-Economic Data
High impacting UK macroeconomic data was in short supply this week. The two most influential releases were on Monday, the construction pmi and Tuesday the service sector pmi. Both activity in the construction sector and the service sector beat analysis forecasts in October. But that is where the good news ends.
The construction pmi ticked higher to 44.2 in October, up from 43.3 in September. A figure below 50 indicates contraction. This was the sixth straight month of contraction for the sector. Domestic political uncertainty and concerns over the broader economic outlook impact the sector.
Activity in the British service sector also surprised to the upside. The UK’s dominant sector stagnated in October, recording 50 on the pmi index. This was up from 49.5 in September, one of the lowest readings since the UK was last in recession in 2009. Brexit concerns depressed new orders, whilst consumers remained cautious. The UK service sector accounts for around 80% of the UK economy. Investors saw no reason to cheer stagnation in the sector.
Bank of England
The pound tanked on Super Thursday, the day that the central gave its monetary policy decision, released the minutes from the monetary policy meeting and updated the market with its quarterly inflation report.
As analysts had forecast, the BoE kept monetary policy unchanged, with interest rates holding steady at 0.75%. In the quarterly inflation report the BoE slashed its economic growth forecasts for the coming years. The central bank cut its 2021 forecast from 2.3% to 1.8%, the 2020 forecast to 1.2% from 1.3% and this year it raised the forecast to 1.4%. The gloomy prognosis for the UK economy resulted in a more dovish stance from the central bank.
The minutes from the MPC showed that two policy makers, Michael Saunders and Jonathan Haskel unexpectedly voted to cut interest rates by 0.25% immediately. Whilst market participants had been expecting the BoE to drop its hawkish bias, they had not envisaged such a dovish panel. The pound fell because with two dissenters, the central bank is now closer to cutting interest rates than before.
Parliament was officially dissolved during the week and the election campaigns for the general election on 12th December began. The Conservatives had a rocky start with gaffs from leading ministers. However, leader of the Conservatives Boris Johnson remains comfortably in the lead. This could help offer some support to the pound across the coming week.
Investors will continue to watch the polls closely. Whilst the pound’s preference is for Brexit just to be cancelled, that is very unlikely. A second preferred outcome for the pound would be Boris Johnson winning the general election by a clear majority. This would mean that he would have a stronger mandate to push his Brexit deal through Parliament without too many problems. The UK would be more likely to leave the EU by 31st January and with a deal in place.
Under this scenario, the UK would avoid a no deal Brexit and would avoid continued Brexit uncertainty which is also dragging on the economy.
This week the UK polls will remain in focus. However, there is also a calendar full of high impacting UK macroeconomic data points that investors will watch. These include Monday’s GDP reading and manufacturing production, Tuesday’s labour report, Wednesday inflation figures and Thursday’s retail sales data. With two dovish BoE policy makers, investors could be particularly sensitive to weak data.
US Dollar: US — China Trade War
Headlines surrounding the US — China trade dispute and progress towards a phase one trade deal dominated movement for the US dollar. The dollar trended higher across the week as investors became increasingly confident that a trade deal will be signed soon between the two powers.
Trade deal optimism sent the US stock market to a record high earlier in the week, boosting demand for the US dollar.
A report from Reuters suggested that the President Trump and President Xi could sign a phase one trade deal on 3-4th December at the NATO meeting in London. Both the US and China have agreed to rollback the tariffs already applied at different phases of the trade deal agreements.
The dollar has benefitted from hopes that a trade deal will be achieved soon. This is because the US manufacturing sector has experienced a slump amid the ongoing trade dispute. Investors believe that a trade deal and the rolling back of tariffs will help the US manufacturing sector rebound, before it shows signs of spilling over into the consumer sector.
US Factory orders data at the start of the week was weaker than what analysts had been expecting. US factories suffered a steeper than expected fall of -0.6% in orders in September, indicating that the US manufacturing sector was still being held back by the US — China trade dispute. This was the steepest decline in 4 months. However, the dollar shrugged off the data thanks to the apparent thawing of relations between the US and China.
ISM Non- Manufacturing Data
The dollar was also supported by service sector data. The ISM non-manufacturing index showed that the service sector rebounded in October after hitting a three-year low in September. The pmi jumped to 54.7 in October, up from 52.6 in September, whereby a figure over 50 indicates expansion. The data signalled that the weakness the US industrial sector had not spread to the dominant service sector. The figures helped ease fears of a slowdown in the US economy. This left investors to believe there is a lower probability of the Fed cutting interest rates.
Trade headlines will remain in focus this week. The headlines are often two steps forward, one step back, so more volatility could be on the cards. Additionally, investors will be watching macro-economic data in the form of inflation data on Wednesday and retail sales, industrial and manufacturing production later in the week. Federal Chair Jerome Powell will also give a testimony; investors will be looking for confirmation that the Fed does not intend to cut rates again this year. Any hints of dovishness could drag on the greenback, whilst a hawkish outlook could see the dollar extend this weeks’ gains.
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