Pound to Dollar Rate Tripped Up by Slowing UK Growth

Pound to Dollar Rate Tripped Up by Slowing UK Growth

The pound’s march higher against the dollar stalled on Friday after Britain’s economy showed signs of slowing in July. The brakes were put on the nation’s strong economic bounce-back from the Covid-19 pandemic in July as a fresh wave of Covid cases forced huge numbers of workers to self-isolate under government rules to restrict the spread of the virus.

Staff shortages within supermarkets and the wider supply chain are making it difficult to restock shelves and deliver goods. This was evidenced by Friday’s monthly purchasing managers’ index (PMI) data, which revealed the scale of the impact.

The IHS Markit/CIPS flash composite PMI fell to 57.7 this month from 62.2 in June – a reading over 50 indicates economic growth. This represented the lowest reading since March and a sharper drop than economists had forecast.

Chris Williamson, chief business economist at IHS Markit, said: “July saw the UK economy’s recent growth spurt stifled by the rising wave of virus infections, which subdued customer demand, disrupted supply chains and caused widespread staff shortages, and also cast a darkening shadow over the outlook,”

Other data released on Friday by the Office for National Statistics showed retail sales volumes increased 0.5% in June, taking them 9.5% above pre-pandemic levels. This was fuelled by a sharp rise in food and drink during the Euro 2020 football tournament.

US business activity cools

The dollar edged higher on Friday after a choppy few days during which risk appetite fluctuated, with investor attention now focused on this week’s US Federal Reserve meeting.

Supply constraints meant activity amongst US businesses grew at a moderate pace in July for the second consecutive month. This points towards a cooling in economic activity after what was expected to have been a robust Q2.

IHS Markit’s flash US Composite PMI Output Index – which monitors the manufacturing and services sectors – dropped to a four-month low of 59.7 from 63.7 in June.

Chris Williamson said: “Short-term capacity issues remain a concern, constraining output in many manufacturing and service sector companies while simultaneously pushing prices higher as demand exceeds supply.”

Looking ahead

New Homes Sales – an important measure of US housing market conditions – are slated for release from the US Census Bureau today. The first release from the UK economy this week arrives on Tuesday when the British Retail Consortium Shop Price Index – a measure of price changes in popular retail outlets in the UK – hits the headlines.

Minutes from the July meeting of the Federal Open Market Committee meeting are released on Wednesday. This closely monitored release will provide clues around the future direction of US monetary policy.