The hardening prospect of a US rate rise this month together with some disappointing manufacturing data saw the pound weaken against the dollar today.
Comments made by a senior central banker suggested that the Federal Reserve may take a more aggressive stance on US interest rates than many are expecting.
New York Federal Reserve President William Dudley said in a televised interview that the case for tightening monetary policy has become ‘a lot more compelling’ since the US election.
The developments sent the pound lower by 0.62 per cent to sit at $1.22 as currency traders bet that a hike will be voted through at the Fed’s march monetary policy meeting.
Capitol building in Washington DC where Trump addressed Congress last night
Interest rate rises in America typically strengthen the dollar, thereby making the pound weaker on a relative basis.
Markets were also absorbing President Trump’s first ever speech to Congress in which he struck a more conciliatory tone.
He called for an end to ‘trivial fights’ and a renewal of ‘the American spirit’ while also doubling down on election promises such as a ramping up military spending and replacing the ‘Obamacare’ health programme.
Traders interpreted it as being positive for the US economy, and therefore for the dollar.
The FTSE 100 is generally boosted by a weaker pound and today was no exception, with the index climbing 1.3 per cent to reaching a new record high of 7360 points.
According to Aberdeen Asset Management investment manager Luke Bartholomew the comments made by Dudley were particularly significant and indicate a rate rise is imminent.
‘Dudley’s really put the cat amongst the pigeons,’ he said. ‘The market has flipped from being sceptical that a move in March was likely, to now thinking it is more likely than not. Investors now think there’s about a 60% chance of a hike.’
‘Inflation data today and [Federal Reserve Chair] Janet Yellen’s speech on Friday are the next big landmarks. But this week is looking a lot like a coordinated attempt by the Fed to put a March hike firmly on the table.’
‘Dudley is Yellen’s close lieutenant so it’s hard to imagine him saying something that she doesn’t broadly agree with,’ Bartholomew noted. ‘The Fed’s goal of hiking three times this year is looking much more achievable all of a sudden. In fact, the market now needs to seriously think about the possibility of four hikes this year.’
This all coincided with news that the UK manufacturing sector remains relatively strong, but activity has dipped slightly according to data from IHS Markit.
The Markit/CIPS UK Manufacturing purchasing managers’ index (PMI) had a reading of 54.6 in February, down from 55.7 in January and below forecasts of 55.6.
A reading above 50 indicates growth in the sector though, so at 54.6 things still look healthy.
UK manufacturing activity continues to grow but at a slightly reduced pace
‘Two months into 2017 and despite a slowing in the rate of growth in February, manufacturers continue to register strong levels of output, healthy order books and growing trade courtesy of a weak sterling,’ noted Mike Rigby, head of manufacturing at Barclays.
‘However, despite the recent surge in exports, the sector continues to rely mostly on domestic demand and with price rises feeding through on the back of growing input costs, even with their recent easing, inflationary pressure continues to hover with intent,’ he added. ‘It’s how manufacturers now respond, particularly in their investment intentions, that will help determine how long the raised level of optimism in the sector continues.’