Pound to Dollar Rate Languishes in the 1.36 Mid-range

GBP USD Rate Consolidates on Interest Rate Expectations

The pound remained under pressure on Tuesday amid the energy crisis and subsequent global stock market sell-off – and in the absence of notable economic indicators from the UK economy, it was lacking support from elsewhere.

The UK currency is vulnerable to a surge in gas prices – and the resulting risk-off mood in markets – that threatens to cut off UK consumers and restrict UK industrial output, with the nation’s unique reliance on gas for electricity output responsible for the sensitivity. What’s more, the government’s cap on energy prices warps the market, leaving some smaller utility providers unable to proceed with operations. Consequently, four energy providers have been forced to cease trading so far this month. Time will tell how these economic headwinds will influence the outcome of tomorrow’s Bank of England (BoE) meeting of monetary policymakers.

Investors await Fed meeting minutes

The dollar softened slightly from the one-month high it held over the pound on Monday as global markets stabilised yesterday – and investors looked ahead to the conclusion of the latest meeting of US Federal Reserve officials today.

There was some encouraging news from the US housing market, after data from the Commerce Department showed homebuilding increased more than expected last month, likely buoyed by an uptick in the construction of multifamily buildings – although land and labour shortages remain problematic.

Housing starts rose 3.9% to a seasonally adjusted annual rate of 1.615 million units in August. Data for July was revised up to 1.554 million units from the previously reported 1.534 million units. Economists had forecast housing starts would rebound to a rate of 1.555 million units.

The Commerce Department data also showed that building permits for new homes rose to a seasonally adjusted annual rate of 1.73 million – up 6% from July and 13.5% from 12 months ago. Economists had expected permits to record a pace of 1.62 million.

Looking ahead

The two-day meeting of the Federal Open Market Committee wraps up today. Fed officials are expected to paint a clear picture of the central bank’s plan to begin tapering pandemic-era stimulus as early as November amid a robust economic recovery. Investors are eager for clues on the fate of the huge bond-buying programme the Fed implemented last year to stabilise markets and prop up the pandemic ravaged economy. The meeting minutes will also include a fresh set of projections for growth, unemployment, inflation – and, crucially, expectations for when interest rates may be hiked from current near-zero levels.

The UK economic calendar finally springs into life tomorrow when the influential Markit Services and Manufacturing PMIs are published. But it’s events on Threadneedle Street that will attract the most attention as the BoE Monetary Policy Committee prepares to release minutes from its latest meeting. Investors will be looking for signs the central bank could hike interest rates sooner than expected, as data clouds the UK economic outlook.