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Pound storms to two-month high against dollar after shock fall in key US indicator

Jake Cordell
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Feeling flush: The pound hasn't bought this many dollars since the end of June
Feeling flush: The pound hasn't bought this many dollars since the end of June (Source: Getty)

The pound has surged to a new two-month high against the dollar after a crucial indicator of activity in the US economy crashed, raising yet more question marks over the timing of the next interest rate rise.

The closely-watched Institute for Supply Management (ISM) non-manufacturing purchasing managers' index (PMI) dropped from 55.5 in July to 51.4 in August - coming in barely above the crucial 50 score which marks growth.

The dollar immediately tumbled on the news, with sterling shooting up to above $1.34 for the first time since the end of June. That marked a 0.8 per cent climb for the day. The greenback was also down dramatically against the euro after the survey results were published, crashing 0.6 per cent to €0.8920.

Read more: Two more investment banks say UK to avoid recession

The non-manufacturing PMI is a barometer of output across every bit of the US economy except the manufacturing industry. Survey compilers ISM said the reading of 51.4, which was a six-year low and comfortably down on expectations of 55, "represents continued growth ... at a slower rate." Anthony Nieves, chair of the ISM said the reading corresponded with GDP growth of just one per cent on an annualised basis.

A string of good UK data and weak US performance has hepled sterling stage a mini-renaissance over the summer.

Sterling also held its ground against the euro today, standing unchanged at €1.1938 at pixel time. Ahead of the figures the pound had edged closer to breaking through the €1.20 mark, hitting an intraday high of €1.9995 before dipping back.

The weak figures are another piece of the US rate rise puzzle, with the falling dollar implying market traders believe Janet Yellen will now have to hold the federal funds target range between 0.25 per cent and 0.5 per cent for a little longer.

Crucially, in terms of the outlook for interest rates, both the employment and prices section of the index dropped back, prompting Ian Shepherdson of Panethon Macroeconmics to suggest bumper employment growth "is not likely in the near-term." The Fed's dual mandate to target both inflation and jobs suggest an easing in these measures will soften the pressure to raise rates to keep prices in check.

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