A better-than-expected RICS house price balance headline for September offered support to the Pound, suggesting that the domestic housing market is still in a relatively robust state of health.
However, the underlying details of the report indicated that demand from buyers is easing in response to speculation that the Bank of England (BoE) will raise interest rates before the end of the year.
The mood towards Sterling also remained somewhat muted on Thursday morning as markets awaited the end of the latest round of Brexit negotiations.
As there have been no signs of a significant breakthrough it looks likely that the next phase of talks will not be able to commence on schedule.
Coupled with a harder line of rhetoric from Theresa May this suggests that the risk of a hard Brexit remains, maintaining downside pressure on GBP exchange rates for the foreseeable future.
Further volatility is likely in the next week with the release of September’s UK inflation data, which could improve the case for an imminent BoE rate hike.
If inflationary pressure accelerates above 3% on the year this would significantly increase the likelihood of BoE policymakers adopting a hawkish stance on monetary policy.
Even so, with markets already pricing in a relatively high likelihood of monetary tightening the upside potential of the Pound US Dollar exchange rate is likely to be somewhat limited.
On the other hand, any dip in inflation could undermine the odds of a 2017 interest rate hike, to the detriment of the Pound.
US Dollar Wavers as Fed Expresses Doubts Over Inflation
Demand for the US Dollar softened a little in the wake of the publication of the Federal Open Market Committee’s (FOMC) September meeting minutes.
Investors were slightly discouraged to find that some policymakers had expressed concerns over the relative weakness of domestic inflation, suggesting that the central bank is not in an entirely hawkish mood.
However, as Philip Marey, senior US strategist at Rabobank, noted:
‘It is clear that the majority in the FOMC continues to believe in the Phillips curve, despite its conspicuous absence in recent years. In combination with the notion that monetary policy works through the economy with a lag, this leads them to think that a third rate hike is warranted before the end of the year. This is despite the fact that low inflation this year remains a mystery to Fed.’
If Friday’s US consumer price index surprises to the upside this could boost the ‘Greenback’ against its rivals, offering the Fed some cause for confidence.
That said, as CPI is not the Fed’s preferred measure of inflation even a stronger showing here may struggle to convince the more dovish members of the FOMC that the inflationary outlook is picking up.
A sharp increase in advance retail sales could also weigh down the GBP USD exchange rate ahead of the weekend.
Current GBP USD Interbank Exchange Rates
At the time of writing, the Pound US Dollar exchange rate was on a narrow uptrend in the region of 1.1163. Meanwhile, the US Dollar Pound trending lower at 0.7550.