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The Pound-to-Dollar Exchange Rate Lacks Support As Fed Minutes Confirms Plan To Continue Hikes

FED Minutes Spark GBP to USD Exchange Rate Losses

As September’s Federal Open Market Committee (FOMC) meeting minutes indicated that policymakers remain on track to deliver further monetary tightening the Pound Sterling to US Dollar (GBP/USD) exchange rate came under additional pressure.

The relatively hawkish tone of the minutes boosted the likelihood of interest rates seeing another hike before the end of the year, increasing the appeal of the US Dollar.

Worries over political pressure also eased in response to the minutes, with investors relieved that the Fed appears unswayed by the Trump administration’s criticism of higher interest rates.

GBP exchange rates struggled to find support, meanwhile, as September’s UK retail sales data fell short of forecast.

With sales contracting -0.8% on the month confidence in the outlook of the domestic economy naturally diminished.

Hawkish Fed Minutes Encourage US Dollar (USD) Exchange Rate Gains
Although markets had anticipated another set of hawkish Fed meeting minutes the US Dollar still pushed higher in the wake of the release.

As Alvin Liew, senior economist at UOB Group, commented:

‘The main takeaway from the latest minutes of the 25/26 Sep 2018 FOMC meeting is the Federal Reserve remains on course to hike rates further.
‘The Fed was broadly and visibly more confident about the US economy as we note the numerous times positive words like “strong”, “high” and “solid” appeared in its assessment of the economy while inflation is widely expected to achieve “the Committee's symmetric 2 percent objective on a sustained basis”.

‘The latest minutes further cements our expectations for another hike this year in the 18/19 Dec FOMC to bring the FFTR range to 2.25%-2.50% by end-2018. We also maintain our 2019 rate hike expectation at three 25bps hikes.’

However, as the odds of a fourth 2018 interest rate hike have already been largely priced into the US Dollar this could limit the potential for further USD exchange rate gains.

Domestic data performed well on Thursday, meanwhile, as jobless claims figures bettered expectations.

With the labour market continuing to show signs of tightening investors saw no reason to sell out of the US Dollar at this stage.

An uptick in September’s leading index offered additional support to USD exchange rates, pointing towards a robust pace of economic growth in the third quarter.

Disappointing existing home sales data may put some pressure on the US Dollar ahead of the weekend, though, as recent signs from the US construction sector and housing market have proved weak.

Weakening UK Retail Sales Weigh on Pound Sterling US Dollar (GBP/USD) Exchange Rate
After a solid run of retail data over the summer months investors were disappointed to find that sales had finally fallen back in September.

This left GBP exchange rates on a generally weaker footing during trade on Thursday, adding to the bearishness seen in the wake of Wednesday’s softer-than-expected consumer price index.

Analysts at TD Securities noted:

‘As the weather effects most recently and World Cup effects prior fade from the data, it seems we are getting the likely slowdown in UK activity data in H2 that we've been looking for.
‘Brexit uncertainty likely won't help here. EU Leaders overnight decided not to schedule a special November summit which could ostensibly approve a deal on the Withdrawal Agreement, but left the door open to holding that if negotiators come back and say they have worked out a deal.’

After Theresa May’s crunch meeting with EU leaders failed to deliver a breakthrough worries over Brexit dented the GBP/USD exchange rate.

With the odds of a no-deal Brexit continuing to rise confidence in the Pound remained limited, with investors fearful of the detrimental impact that could follow the UK leaving the EU without a deal in place.

As UK and EU negotiators remain at odds on the subject of the Irish border talks do not appear likely to advance again in the near term, diminishing the appeal of the Pound.

Friday’s UK public sector net borrowing may add to the bearish mood of GBP exchange rates if the figure points towards increased government debt, highlighting the fragility of the economic outlook.