Pound Slumps on Signs of Slowing UK Economy

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Headlines

  • RBA Left Interest Rates on Hold for Nineteenth Consecutive Meeting – Australian Dollar muted in spite of upbeat commentary
  • Disappointing UK Manufacturing PMI Dented GBP Exchange Rates – Signs point towards weakening UK economy
  • US Dollar Bullish Ahead of Federal Reserve Decision – Markets bet on more hawkish policy outlook
  • Better-Than-Expected GDP Boosted Canadian Dollar – Canadian economy demonstrates continued resilience

Australian Dollar

There was little surprise as the Reserve Bank of Australia (RBA) left interest rates on hold for the nineteenth consecutive policy meeting. As a result, the reaction of the Australian Dollar was rather muted in spite of the more upbeat tone that policymakers took. With markets not pricing in any interest rate hike until mid-2019 the upside potential of AUD exchange rates still looks rather limited, particularly as the US Dollar remained on a bullish footing.

In the absence of any fresh domestic data today the Australian Dollar is likely to remain under pressure as markets brace for the latest Federal Reserve policy announcement.

Sterling

GBP exchange rates slumped yesterday as the UK manufacturing PMI disappointed expectations, dipping from 54.9 to 53.9 in April. This came as an unpleasant shock to investors, suggesting that the economic weakness seen in the first quarter was not as transitory as hoped. With the UK economy showing fresh signs of slowing the mood towards the Pound naturally soured, as Brexit-based concerns continue to hang over the domestic outlook.

If the UK construction PMI returns to a state of expansion as forecast this could put a floor under the Pound today.

Euro

Confidence in the single currency remained generally lacking on Tuesday with markets seeing little reason to favour the Euro over its rivals. A stronger US Dollar continued to put downwards pressure on EUR exchange rates as the policy divergence between the Federal Reserve and European Central Bank (ECB) looks set to widen further. Lingering political uncertainty in Italy also dented the appeal of the Euro.

Any slowdown in the first quarter Eurozone gross domestic product figures may extend the losses of EUR exchange rates.

US Dollar

Although the ISM manufacturing index fell short of forecast in April, slipping from 59.3 to 57.3, this was not enough to knock USD exchange rates off their positive footing. The index remains firmly within expansion territory, suggesting that the underlying health of the US economy is still robust. With investors confident that the Federal Reserve will maintain a more hawkish tone at its May policy meeting the US Dollar was encouraged to push higher against its rivals.

Even so, as anticipation builds for tonight’s announcement the US Dollar could struggle to hold onto all of its recent gains.

Canadian Dollar

February’s Canadian gross domestic product data bettered forecast overnight, with growth accelerating to 0.4% on the month. This gave investors fresh cause for confidence in the Canadian Dollar, even though the US failed to permanently exempt Canada from its proposed steel and aluminium tariffs. With the domestic economy showing fresh signs of strength CAD exchange rates were still encouraged to trend higher, although the odds of any Bank of Canada (BOC) policy shift remain limited.

A fresh uptick in US crude inventories may weigh on the Canadian Dollar, however, if oil prices come under renewed pressure.

New Zealand Dollar

A sharp increase in New Zealand building permits in March offered support to NZD exchange rates, boosting confidence in the outlook of the domestic economy. This stronger showing encouraged bets that price pressures within the New Zealand economy could start to pick up in the months ahead, although doubts remain over the inflationary outlook.

With no change forecast for the first quarter unemployment rate the New Zealand Dollar may struggle to hold onto any particular traction ahead of the latest Fed meeting.

Data Released

May 2nd 08:45 NZD Unemployment Rate (1Q) 4.5%
May 2nd 18:30 GBP Construction PMI (APR) 50.5
May 2nd 19:00 EUR Eurozone Gross Domestic Product (YoY) (1Q) 2.5%
May 3rd 04:00 USD Federal Open Market Committee Rate Decision 1.75%

Post by TorFX

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