Robust US ISM Report Strengthens Greenback Against Pound

A crucial poll of the U.S. economy arrived in better than anticipated, causing the Dollar to recover prior to the weekend. The US ISM services PMI registered 55.1 in February, exceeding forecasts for a decline to 54.5 from 55.2 in January.

The decline in stocks was accompanied by increases in U.S. bond rates and the greenback; a typical indication that investors believe the Federal Reserve has additional work to accomplish regarding interest rates before the economy declines considerably to reduce inflation. The Pound to Dollar exchange rate (GBP/USD) retreated below 1.20 to 1.1984, bringing bank transfer rates to the range of 1.1565-1.1745, aggressive holiday and benchmark rates to approximately 1.1820, and challenging payment rates to 1.1950.

Recent US data that exceeded expectations have grabbed the markets off guard, according to Bipan Rai, Chief of FX Strategy at CIBC Capital Markets. This resulted in a prolongation of Fed terminal gains and a strengthening of the US dollar.

The ISM is the most recent in a series of robust U.S. economic data releases that affirm the economy maintains a level of robustness in line with higher inflation levels. Consequently, the capital markets are factoring in additional hikes in interest rates by the Federal Reserve, which speculators believe will inevitably be observed and precipitate a more pronounced economic decline.

For the time being, the possibility of higher interest rate forecasts raises the interest rate on US bonds, which keeps the USD-supportive movement of capital as investors demand better returns. According to Kieran Clancy, Principal US Economist at Pantheon Macroeconomics, the ISM series has been volatile as of late, and the weather has not helped. In the United States, December was marked by snowstorms, while January and February have been unseasonably warm.

“Excluding the substantial background noise, the trend in ISM services has been relatively stable since the summer, in part due to a reduction in excess savings accrued during Covid,” he explains.

In the future, however, the economy will not be resistant to the Fed’s latest rate increases. “Combative tightening is still making its way thru the market, and slightly more than 50% of people’s surplus savings have already been expended,” argues Clancy.

According to CIBC Capital Markets, the USD could be sustained in the coming years by the economy’s strength and the Fed’s sustained rate increases. Nonetheless, “we even now anticipate the Fed to fail to hit the market’s forecasts for a rate hike, impacting on the USD through the middle of the year,” as attention shifts toward other developed economies raising their interest rates, according to Rai.

Simon Harvey, the chief of FX analysis at Monex, asserts, “further than our 1-year forecast, we are more confident that the USD will decline.”

“We believe Q2 will be a stronger entry point for speculators as central banks throughout the DM arena should be nearing the end of their hiking phases, while the rate of worldwide growth is inclined to climax as the drag from monetary tightening begins to subside and China’s economic rebound reaches its zenith,” he adds.