Pound Dollar Exchange Rate Above 1.71, BUT GBP/USD at Risk of Being Overextended

At present the pound to dollar exchange rate (GBP/USD) is trading at 1.7148. The pound euro rate is meanwhile sitting at 1.2550. Earlier gains against the dollar have eased after ADP’s June National Employment Report shows US private payrolls adding 281,000 jobs last month, well above economists’ expectations which aided the USD higher. Neverthless, we still see the GBP/USD at 6 year highs.

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Why is sterling stronger?

Strength at the start of the new month comes as UK PMI Manufacturing came in at 57.5 versus 56.7 eyed as all the key components showed improvement.

The employment index rose 55.8 from 54.4 the month prior while new orders rose to 61.1 from 59.5.

As analysts as Markit noted, "UK manufacturing continued to flourish in June, rounding off one of the best quarters for the sector over the past two decades. With levels of production surging higher, and order books swollen by a further upswing in demand from both domestic and overseas clients, job creation accelerated to its highest for over three years."

"GBP resurfaced above 1.70 last week after a brief dip on Carney’s testimony to the Treasury Select Committee, with the FPC recommendations on Thursday not proving aggressive enough to disturb market expectations of MPC tightening around year end," say Lloyds Bank Research in a currency briefing to clients at the start of a new week.

However Lloyds note that progress above 1.70 seems likely to depend more on general USD weakness than specific GBP strength this week.

"It seems unlikely that any of this week’s data will significantly disturb UK rate expectations, although the PMI data have potential to have some impact, but we would expect a mild upside bias to GBP/USD helped by a firm EUR and anticipation of the US employment report," say Lloyds.

Week ahead for the British pound: PMI data dominates

Tuesday: UK manufacturing PMI (June), 9.30am: UK manufacturing is expected to weaken to 56.5 from 57 in May. Market to watch: EUR/USD, EUR/GBP

Wednesday: UK construction PMI (June), 9.30am: Construction forms only a small part of the UK economy, so this index's importance is limited. It is expected to weaken to 59.8 from 60. Market to watch: EUR/USD, EUR/GBP

Thursday: UK composite & services PMI (June), 9.30am: The services PMI is the most important of the UK readings, and is expected to weaken to 58 from 58.6. Market to watch: EUR/USD, EUR/GBP

The week had for the dollar exchange rate

On Monday: US pending home sales (May), 3pm: These should rise 1% month-on-month, and the year-on-year decline may ease from the previous 9.4%. Market to watch: Dow Jones, S&P 500, dollar crosses

Chicago PMI (June), 2.45pm: The index is expected to drop to 62 from 65.5 last month, indicating some further weakness in the US economy. Market to watch: Dow Jones, S&P 500, dollar crosses

Tuesday: US manufacturing PMI (June, final), 2.45pm, ISM mfg index (June), 3pm: The ISM reading should increase to 55.5, from 55.4 in May, and little change is expected for the manufacturing PMI revision. Market to watch: Dow Jones, S&P 500, dollar crosses

Wednesday: ADP employment data (June), 1.15pm: The payroll company ADP produces its own jobs report, and they expect 205K jobs to have been created in June, from 179K in May. Market to watch: Dow Jones, S&P 500, dollar crosses

Thursday: US services & composite PMI (June, final), 2.45pm, ISM non-manufacturing index (June), 3pm: The ISM number is expected to drop back to 56 from 56.3, while the final readings on PMIs are not expected to see significant change. Market to watch: Dow Jones, S&P 500, dollar crosses

US Non-Farm Payroll data. Due out on Thursday as opposed to the traditional Friday owing to US Independence Day.