Pound US Dollar (GBP/USD) Exchange Rate Weakens as US Wage Growth Accelerates
As January’s US labour market report surprised to the upside the Pound to US Dollar (GBP/USD) exchange rate slumped sharply ahead of the weekend.
While the headline non-farm payrolls figure bettered expectations, though, it was the improvement in wage growth that primarily drove the US Dollar (USD) higher across the board.
Markets greeted the news that average weekly earnings had accelerated 2.9% on the year in January, something which is likely to encourage Federal Reserve policymakers.
Given that weaker wage growth has been a key factor in limiting the hawkishness of the Fed this improvement naturally fuelled bets that a March interest rate hike is on the cards.
As James Knightley, Chief International Economist at ING, noted:
‘Consequently, it will need a big shock to prevent the Fed from hiking in March, but it could happen in the form of a damaging government shutdown should politicians fail to resolve their differences – next deadline is February 8. Nonetheless, it looks more and more likely that we will have to revise up our call for three Fed rate hikes this year to four.’
Pound (GBP) Exchange Rates Muted as UK Construction PMI Falls to Near-Stagnation
Confidence in the Pound (GBP), meanwhile, wobbled in response to a disappointing UK construction PMI, adding to the bearishness of the GBP/USD exchange rate.
Although forecasts had pointed towards a weakening in the measure markets were still shocked to find that the index had dipped to just 50.2.
This puts the construction sector dangerously close to stagnation territory, undermining hopes that the UK economy got off to a stronger start in 2018.
However, as much of this weakness can be attributed to the collapse of outsourcing firm Carillion the negative impact of the data was still somewhat limited.
Markets are more likely to react to Monday’s corresponding services PMI, given that the sector accounts for more than three quarters of UK economic activity.
Another weak showing here could leave the GBP/USD exchange rate vulnerable to further losses, undermining optimism in the outlook of the domestic economy.
On the other hand, a better-than-expected result could give investors fresh incentive to buy into the Pound.
Solid ISM Non-Manufacturing Index Forecast to Hamper GBP/USD Exchange Rate
Although the odds of a March Fed interest rate hike are already largely priced into the GBP/USD exchange rate strong US data could continue to pressure the pairing in the days ahead.
With January’s ISM non-manufacturing composite index forecast to have strengthened modestly confidence in the underlying health of the world’s largest economy is likely to improve further.
Anything short of a significant downside surprise would struggle to have a significant impact on the bullish US Dollar.
However, with fresh domestic data looking rather limited over the course of the coming week the GBP/USD exchange rate could find some support as the US Dollar loses momentum.
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