The GBP/USD exchange rate hit the highest levels since the day after the EU referendum back in June 2016. The main cause for these levels at present is US Dollar weakness rather than Sterling strength.
The US Dollar has received a welcome boost this afternoon. The Institute for Supply Management’s manufacturing index posted higher than expected figures in December, with construction output in November also increasing more than anticipated. Whilst the Dollar remains weak against Sterling, the Dollar posted gains against both the Euro and the Japanese Yen.
Manufacturing is also likely to increase further throughout 2018 following the approved tax cuts. What is more interesting is that manufacturing is likely to pick up even more in the US should the Dollar continue to weaken and the global economic resurgence continues, a similar situation of that in the UK manufacturing sector at present.
Will the Dollar continue to weaken?
The main driver of the Dollar’s weakness of late has been based on speculation. Firstly, speculation that the US Federal Reserve wouldn’t stick to the three interest rate hikes that were originally planned at the end of 2017 and that the latest tax reform which is now official law in the US wouldn’t provide as much economic boost as first thought. Today’s economic data may prove to be a turning point for sceptics, the latest manufacturing reports and construction data released today completes a healthy picture for the entire US economy, ranging from housing to consumer spending.
This may be the start of the end of Dollar weakness in my opinion. The next set of important data on Friday will see non-farm payroll data released and could start to see investors return to the USD if this is positive, placing bets that the USD is set to strengthen in the up and coming months.