Published On: Wed, Jun 6th, 2018

Pound dollar exchange rate: Sterling on rise as Mexico threatens USA with tariff retaliati | City & Business | Finance

Today’s data calendar for the UK is rather sparse, but Sterling has still managed to find support from yesterday’s highly significant UK services PMI, which smashed forecasts by rising from 52.8 to a robust 54.0.

Making up near 80 per cent of the UK’s GDP, a rise in service sector activity bodes well for the state of the British economy in the second quarter, and should help to push the Bank of England (BoE) even closer to raising interest rates in August this year.

There are, however, ongoing concerns amongst economists regarding the Brexit negotiation process, with many analysts anxious that uncertainty and a lack of progress will continue to limit business investment and potentially weigh on the economy.

Whilst there has been some evidence of slowed business investment in the first half of this year, the overall trajectory now seems to be one of steady growth, with important indicators like the latest raft of PMI releases pointing to a strong recovery in Q2.

Across the pond, investors were disappointed to see that Mexico has now responded with tariffs of their own against the US, threatening to levy taxes on US pork, bourbon whisky, steel and cheese.

This move dismayed many domestic businesses, with pork producers facing a 20 per cent tariff on any exports going to Mexico (the largest market for US pork exporters).

The decision would only affect a tiny proportion of overall US GDP, but many traders were skittish simply because it marked yet another escalation – with any sign of worsening global trade being anathema to investors.

In slightly better news, China extended the US an olive branch yesterday in the form of an offer to buy nearly $70bn worth of US goods over the next year – as long as the Trump administration backed off on its proposed tariff measures.

White House officials were somewhat sceptical that this would have much effect on the overall US trade deficit with China, however, leading many to believe that the offer will not be taken, and negotiations would simply continue.

Beyond this, yesterday’s US ISM non-manufacturing services composite index stormed ahead to a score of 58.6 in May, up from the previous result of 56.8 and the forecast of 57.6.

This bodes well for the state of the US economy, especially after the upbeat labour market statistics released last week.

The dollar continued to struggle to capitalise, however, with trade concerns seeming to dominate recent movements.

Looking ahead, today will feature the US trade balance results for April, with the US deficit expected to widen from -$49.0bn to -$49.1bn.

If this occurs then we could see GBP/USD continue to trade even higher.

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