GBP USD Boosted as UK Manufacturing Ends 2021 on a High

GBP USD Exchange Rate Pulls Back as UK Inflation Hits Fresh 40-Year High 

The pound jumped above 1.35 against the dollar on Tuesday on the back of a triumvirate of factors: a risk-on mood, which boosted demand for the UK currency; growing expectation that the Bank of England will raise interest rates next month; and the UK’s finalised manufacturing Purchasing Managers’ Index.

British manufacturing grew at a slightly quicker pace than originally thought last month and pandemic-fuelled supply chain issues eased slightly, taking some of the pressure off rising input prices, a survey showed yesterday.

The final reading of the IHS Markit/CIPS UK manufacturing PMI for December was 57.9, rising from a preliminary reading of 57.6 and close to November’s three-month high of 58.1.

According to IHS Markit, the recovery was still weaker than six months ago due to ongoing supply chain constraints and soft exports, which were curtailed by Brexit-related problems and the prospect of fresh Covid restrictions.

US manufacturing gauge falls

The dollar was also supported by interest rate expectations on Tuesday as investors cranked up bets on the Federal Reserve raising borrowing costs – a move that market analysts believe could trigger broader gains for the US currency this year.

It wasn’t all good news for the dollar yesterday: a gauge of business conditions in the US manufacturing sector fell short of expectations at the end of last year, reflecting declines in delivery times and prices.

The Institute for Supply Management’s (ISM) manufacturing PMI for December showed factory activity dropped more than expected to 58.7 – its lowest level since January 2021 – from 61.1 in November. Economists had expected the index to dip to 60.1. A reading above 50 indicates expansion in the manufacturing sector.

Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee, said that: “The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment,”

“Coronavirus pandemic-related global issues – worker absenteeism, short-term shutdowns due to parts shortages, employee turnover and overseas supply chain problems – continue to impact manufacturing.”

Looking ahead

An empty economic calendar in the UK means investor attention will be focused on data slated for release from the US economy today – most notably the ADP employment change reading for December, which is regarded as a precursor for the much-anticipated nonfarm payrolls report on Friday.

Investors will also get a closer look at the Fed’s monetary policy outlook, with the minutes of the December FOMC meeting scheduled for release today – which could shed light on several key issues: the pace of rate hikes; the decision to taper asset purchases; and when the central bank will start reducing its balance sheet.

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