Market reaction to Chancellor Philip Hammond’s UK budget has proved rather muted, meanwhile, leaving Pound Sterling (GBP) with little in the way of momentum.
Investors have failed so far to take much encouragement from Hammond’s spending plans, in spite of Downing Street indicating that budget commitments will be delivered whether there is a Brexit deal or not.
Signs of Robust US Inflation Encourage US Dollar (USD) Gains
UPDATE: The latest US personal consumption expenditure data gave US Dollar (USD) exchange rates a boost this afternoon, with the monthly core figure bettering forecast.
This suggests that inflationary pressure within the US economy remains robust, further cementing the odds of the Federal Reserve raising interest rates in December.
An improvement in October’s Dallas Fed manufacturing activity index offered additional support to the US Dollar, meanwhile, as confidence in the economic outlook improved.
Weaker UK Consumer Borrowing Keeps Pound Sterling (GBP) Under Pressure
September’s UK mortgage approvals and consumer credit data did not paint the most encouraging picture of the economic outlook, helping to limit the appeal of Pound Sterling (GBP).
As growth in unsecured consumer lending slowed to its weakest level since June 2015 this suggests that domestic sentiment is diminishing.
Given that consumer spending is the dominant driving force of the UK economy investors were naturally discouraged by this sign of increasing caution.
Although the Bank of England (BoE) had previously expressed concerns over elevated levels of household debt this slowdown is unlikely to give policymakers any significant cause for confidence.
If the UK economy continues to show signs of losing its momentum heading into 2019 the chances of further BoE interest rate hikes are likely to diminish, leaving GBP exchange rates with limited support.
Risk Averse Market Sentiment Benefits USD Exchange Rates
A lingering sense of market risk aversion has helped to buoy the US Dollar (USD), meanwhile, as global stock markets remain under pressure.
The latest political developments in Germany did little to ease the minds of investors, with a poor showing in a regional election leading Chancellor Angela Merkel to step aside as chairwoman of the CDU party.
With geopolitical risks and trade tensions dominating the global outlook the appeal of the safe-haven US Dollar remained elevated, keeping the Pound Sterling to US Dollar (GBP/USD) exchange rate on the back foot.
While recent US data has proved mixed in nature this has not been enough to prevent USD exchange rates from maintaining a bullish bias.
US Dollar (USD) Forecast to Benefit from Steady US Inflationary Pressure
Demand for the US Dollar could strengthen this afternoon with the release of September’s personal consumption expenditure data.
The figures are expected to point towards another solid month of US inflation this is likely to bolster the Federal Reserve’s case for a December interest rate hike.
Although the odds of an imminent hike are already largely priced into the US Dollar another sign of steady inflationary pressure should keep USD on a stronger footing.
As anticipation mounts for Friday’s non-farm payrolls report, however, the GBP/USD exchange rate could find some support.
Any signs that wage growth is failing to keep up with the tightening of the US labour market may prompt investors to sell out of the US Dollar, in the short term at least.
Cautious BoE Outlook to Weigh Down Pound Sterling (GBP) Exchange Rates
Thursday’s Bank of England (BoE) policy meeting may put further pressure on GBP exchange rates, meanwhile.
If policymakers take a more cautious view of the domestic outlook the appeal of the Pound is likely to diminish, with any policy action looking an increasingly distant prospect.
On the other hand, any signs of greater confidence within the Monetary Policy Committee (MPC) may encourage the GBP/USD exchange rate to recover some of its lost ground.
As long as the BoE looks set to leave interest rates on hold for the foreseeable future, though, any Pound upside could prove limited.
Persistent Brexit-based uncertainty is also likely to keep the Pound Sterling to US Dollar (GBP/USD) exchange rate on the back foot for some time to come.