Pound US dollar exchange rate rally undermined by slump in UK’s private sector

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12 shares, 84 points
Pound US dollar exchange rate rally undermined by slump in UK’s private sector 1

According to data published by IHS Markit, the UK’s composite PMI came in at just 48.5 in December, the index’s worst reading since July 2016. The figures revealed that both the manufacturing and service sectors contracted this month, with another cut in employment levels being particularly worrying to GBP investors. Economists attributed the poor reading to heightened political uncertainty over the last month and warned that (alongside weak readings in October and November) the data could point to the UK economy contracting in the fourth quarter. Chris Williamson, Chief Business Economist at IHS Markit, said: “December’s PMI survey data sadly lacked festive cheer, indicating that the economy contracted for the third time in the past four months. 

“The latest decline was the second-largest recorded over the past decade, and increases the likelihood that the economy contracted slightly in the fourth quarter as Brexit-related uncertainty intensified in the lead up to the general election.”

It should be noted however that the “flash” PMI’s were compiled before the result of the election was known, which could lead to them being revised higher in the final release.

At the same time, the US dollar is struggling to attract any buying interest this morning amid some trepidation over the recent announcement of a US-China trade deal.

So far details of the phase one deal remain thin on the ground, which has given markets pause for thought, as has the unorthodox way in which Washington and Beijing held separate press conferences announcing the deal. 

Looking ahead, the GBP/USD exchange rate may continue to face some headwinds tomorrow with the publication of the UK’s employment report.

Economists forecast this will show that unemployment ticked higher in October at the same time that wage growth weakened, likely putting some more pressure on the pound.

Meanwhile, the focus for USD investors will be on the release of the latest US industrial production figures, with the US dollar likely to strengthen if factory output rebounded in line with expectations last month.

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