GBP/USD has ticked lower on Wednesday, after posting sharp gains in the Tuesday session. In North American trade, GBP/USD is trading just above the 1.28 line. There are no British events on the schedule. In the US, there were no major releases. Crude Oil Inventories posted a drawdown of 1.0 million barrels, matching the forecast. On Thursday, the US releases the Philly Fed Manufacturing Index and unemployment claims. As well, US Treasury Secretary Steven Mnuchin will delver remarks in Washington. The markets will also be following BoE Governor Mark Carney, who will speak at two events in Washington.
The pound enjoyed a banner day on Tuesday, as GBP/USD soared 2.3 percent. The pair briefly climbed above the 1.29 line, its highest level since October 2016. The sharp gain was in reaction to Prime Minister May’s surprise announcement of a snap national election on June 8. May had previously said that she would not call early elections, and the current government’s term runs until 2020. Why did May seek a fresh mandate now? One reason is that she is enjoying a huge lead in the polls, and could well improve on her thin majority in parliament. As well, her government has run into difficulties with the opposition and the House of Lords over Brexit, and is hoping that a solid mandate will strengthen her hand as she prepares for the difficult task of negotiating Britain’s departure from the European Union. In announcing the snap election, May said that the country needed stability and certainty ahead of the difficult negotiations with Europe.
What’s next for the Federal Reserve? Based on not-so-subtle hints from the Fed, the markets are expecting two more rate hikes in 2017. There have been calls from some Fed policymakers to raise rates three more times, but this seems unlikely, given disappointing retail sales and CPI numbers in March. These weak numbers are likely to make the Fed more dovish about the US economy, and have prompted the Atlanta and New York Federal Reserve banks to lower their outlook for US economic growth for the first quarter of 2017. The Fed can point to a labor market that is close to capacity as well as strong consumer confidence, but this has not translated into stronger consumer spending, a key driver of economic growth. The odds of a rate hike in June are currently priced at 55%, according to the CME Group, down from 65% earlier in April.
