Commentary from various members of the Federal Open Market Committee (FOMC) did not improve the appeal of the US Dollar, with the general tone of comments proving rather dovish. Investors were not impressed by this latest display of cautiousness, with the odds of a December interest rate hike seeming to diminish as a result.
Even so, the mood towards the US Dollar improved after the weekend as the damage from Hurricane Irma proved to be less severe than initially feared. While the impact of the storm remains significant markets were still encouraged by the prospect of a more limited dent to the US economy, softening the GBP USD exchange rate.
Pound Leaps After UK CPI Betters Forecast
Demand for the Pound surged on Tuesday morning in the wake of a higher-than-expected UK consumer price index, though. Inflationary pressure increased from 2.6% to 2.9% on the year in August, suggesting that the squeeze on household finances is still far from over.
However, this sharp uptick in inflation also spurred fresh speculation over the likelihood of an imminent Bank of England (BoE) interest rate hike. With inflation now almost 1% higher than the BoE’s target rate this increases the pressure on policymakers to act, even though a significant proportion of this rise is still due to transitory factors.
The GBP USD exchange rate could extend its gains further if the BoE does adopt a more hawkish stance at Thursday’s policy meeting. Of particular interest will be whether Chief Economist Andy Haldane finally defects to the hawk camp, with any increased split in the vote likely to boost demand for the Pound.
On the other hand, Sterling could return to a weaker footing if the meeting fails to live up to market expectations and the majority of policymakers maintain a cautious outlook on monetary policy. As long as the BoE looks set to leave interest rates on hold for the foreseeable future this is likely to limit the upside potential of the GBP USD exchange rate.
Higher US Inflation Could Boost Fed Rate Hike Odds
Volatility is likely in store for the US Dollar, meanwhile, on the back of the latest US consumer price index report. Although this is not the Federal Reserve’s preferred measure of inflation a strong showing here could still encourage bets that the central bank may raise interest rates a third time before the end of the year.
Should the consumer price index strengthen from 1.7% to 1.8% as forecast this would give investors fresh cause to favour the ‘Greenback’, retuning the GBP USD exchange rate to a downtrend. However, if the inflation data disappoints this could add to market doubts over the likelihood of the Fed keeping up the pace of its monetary tightening cycle.
Friday’s advance retail sales and University of Michigan consumer confidence index will also be in focus, with both expected to show a dip on the month. Any indications that the world’s largest economy is losing momentum could weigh heavily on the US Dollar, giving the Fed further incentive to take a more cautious approach in the coming months.