The British pound continues to lose ground this week. After considerable losses on Monday, the pair has posted slight losses in the Tuesday session. In North American trade, GBP/USD is trading at 1.3249, down 0.22% on the day. On the release front, British Construction PMI dropped to 48.1, missing the forecast of 51.2 points. As well, the BoE released the minutes of the quarterly Financial Policy Committee meeting. There are no major US events on the schedule. On Wednesday, the US releases two key events – the ADP Nonfarm Payrolls and the ISM Nonfarm Manufacturing report. As well, Federal Reserve Chair Janet Yellen will speak at an event in St. Louis.
Two British PMIs this week, two soft readings. Is the British economy facing a downturn? There was disappointing news out from the construction sector on Tuesday, as Construction PMI fell to 48.1 points. This reading points to contraction, the first time that has occurred since August 2016, shortly after the Brexit vote. The soft reading comes on the heels of the Manufacturing PMI, which slipped to 55.9 in September, down from 56.9 points a month earlier. Although the Manufacturing PMI indicates expansion, the indicator missed expectations, and investors could become nervous about the health of the British economy, as it faces an uncertain future after Brexit. The soft PMIs could also affect the BoE’s interest rate plans. The Bank has broadly hinted that it will raise rates in the near future, with low unemployment and high inflation the main arguments for raising rates. However, if economic indicators are pointing downwards, policymakers will have to carefully consider if the economy is strong enough to absorb a rate hike. We’ll get a look at Services PMI on Wednesday, and if the indicator misses the forecast of 53.3, the pound could lose ground.
The Conservatives are gathered this week in Manchester for a party conference, and there had been speculation that Prime Minister Theresa May would face a challenge to her leadership from foreign secretary Boris Johnson. However, all seems calm, at least for now, and Johnson went out of his way to demonstrate his full support for May. The Conservatives are still smarting from a disastrous election in June, with May being blamed for running a lackluster campaign. She has also zigzagged on Brexit, and has recently toned down her rhetoric, notably with a conciliatory speech in Florence. Still, the Brexit talks have been difficult, with little progress to report after several rounds of negotiations. Key sticking points include the amount that Britain will pay upon leaving, whether the European High Court will have jurisdiction over EU citizens living in Britain, and the border with Ireland. There is also discussion about a transition period, which British businesses argue is crucial for a smooth shift to the post-Brexit era.
After failing to pass a new health care act through a skeptical Congress, Donald Trump has now set his sights on tax reform, another key campaign pledge from Trump’s election campaign. Last week, the White House announced the new tax proposal, called the Unified Tax Reform Framework, which includes lowering corporate and personal income taxes. However, the plan is sketchy and short on specifics, most importantly, how will the plan be paid for? Trump has insisted that the cuts will trigger strong economic growth which will more than pay for itself. However, Moody’s, the well-respected credit rating company, is not impressed by the rhetoric. On Monday, Moody’s said that the tax plan is "likely credit negative", arguing that tax cuts would not be offset in spending cuts, which would result in a higher federal budget deficit and debt. The reduction in federal government revenue would negatively affect the US credit rating. Some Republican lawmakers have already come out against the plan, so it appears that the proposal will have an uphill battle to pass through the House of Representatives and the Senate.
