Pound to Dollar Forecast: GBP to USD Rate Boosted by UK Service Sector Optimism

Pound to Dollar Rate Plummets as Investor Confidence Wanes

UK Services Sector Stagnates but Confidence Surges

Encouraging economic data meant the pound began the first full business week of 2020 with a spring in its step. The UK Services Purchasing Managers’ Index (PMI) indicated that the sector picked up in December and narrowly avoided contraction. The PMI came in at 50, up from 49.3 in November and stronger than the forecast reading of 49.2 – a score of 50 means business activity was unchanged. This stagnation in the sector last month marked an improvement from the reduction in size experienced in November.

Optimism among companies in Britain’s dominant service sector was driven by Boris Johnson’s thumping election victory last month, which helped to clear the clouds of Brexit uncertainty. The pound to US dollar rate subsequently rose back above the 1.31 level following the data release.

It’s worth noting that while the UK’s all-important service sector avoided a contraction last month, this marks the fourth month in a row without growth, raising concerns that the UK economy has stagnated.

Dollar Subdued by Tensions in the Middle East

The dollar began the week on the back foot, as markets continued to monitor the fallout from events in the Middle East. Under normal circumstances, a slump in risk sentiment would see a surge in demand for the safe-haven dollar. However, tensions in the region appear to have left USD investors jittery.

It wasn’t all doom and gloom for the dollar yesterday, however, after it was revealed that economic activity in the US services sector expanded at a more robust rate than forecast in December. The IHS Markit’s Services PMI rose to 52.8 from 52.2 in the previous estimate and 51.6 in November. Business activity in this vital component of the domestic economy gathered pace at the back end of 2019, as rising domestic demand and signs of reviving exports led to higher workloads. This, combined with indications of a recent revival in the manufacturing sector, suggests the overall pace of US economic growth accelerated to its fastest rate since last April.

Looking Ahead

The GBP to US dollar rate could come under pressure today if the US ISM Non-Manufacturing PMI reveals a robust expansion in December. Economists believe it will, with the index forecast to rise from 53.9 to 54.5. However, any resulting dollar strength could be checked by the accompanying US Factory Order figures, which are predicted to have contracted in November.

MPs will resume scrutiny of the withdrawal agreement bill today. If the legislation needed to implement the prime minister’s Brexit deal successfully this month passes through Parliament, the pound could rise in value.

If you would like to learn more about factors influencing GBP/USD exchange rates for an upcoming currency transfer, feel free to contact myself, Jonathan Watson, using the form below.