Pound up on Dollar as US Economic Stats Disappoint, Fed Minutes Ahead

The Pound to Dollar exchange rate trades at 1.2477 at the time of writing having recovered from this week's low set at 1.2401 on the previous day.

The US Dollar retains a positive bias but has given back some of its gains after two noted data releases came in below expectation.

With the US Dollar being traded according to expectations on the number of times the US Federal Reserve will raise interest rates in 2017 data must come in ahead of investor expectations.

Any suggestions the economy is slowing will surely result in the Fed turning shy on moving interest rates.

Manufacturing PMI for February read at 54.3, down from a previous 55, analysts were expecting a reading of 55.3.

Services PMI for February read at 53.9, down from the previous month’s 55.6, analysts were expecting 55.8.

IHS Markit, the compilers of the report, noted the latest reading signalled that private sector output growth moderated from the 14-month high recorded at the start of 2017.

Latest survey data indicated that business optimism moderated among U.S. private sector firms in February, driven by weaker confidence across the service economy.

Chris Williamson, Chief Business Economist at IHS Markit said:

“The drop in the flash PMI numbers for February suggest that the post-election upturn has lost some momentum. Growth of business output, new orders and hiring all waned, as did inflationary pressures.

“February also saw a sharp pull-back in business optimism about the outlook over the next 12 months, which suggests companies have become more cautious about spending, investing and hiring.

“However, even with the February dip, the PMI remains at a level broadly consistent with the economy growing at a 2.5% annualised rate in the first quarter. The survey’s employment index is meanwhile indicating that a respectable 165,000 jobs were added to the economy in February.”

US Fed Minutes Ahead, Short-Term USD Rally Predicted

The US Dollar/Fed interplay will again be in focus later in the day with the release of FOMC minutes to the February meeting due for release at 19:00 GMT.

Markets will want to see whether it includes more clues on the scope for a rate hike in March.

Currently there is a 38% likelihood according to markets and should the probability rise as a result of the minutes then the Dollar should be able to maintain its recent good form.

"Overall, we expect the minutes to signal a gradual tightening pace, in line with the message from Fed Chair Yellen’s congressional testimony last week," says a somewhat sanguine Martin Elund at Nordea Markets.

Fed speakers have meanwhile been sounding increasingly hawkish, suggesting a steeper rate path but also US economic acceleration, which will support corporate earnings.

Philadelphia Federal Reserve president Patrick Harker added his name to members that support a March hike causing Fed Funds rate to jump on Tuesday.

"Given OIS underpricing a March hike, rate only pricing in two hikes and not three, we see possibility of a short term USD rally," says Peter Rosenstreich at Swissquote Bank in Gland, Switzerland.