The British pound remains under pressure this week. In Tuesday’s North American session, GBP/USD is trading at 1.3951, down 0.15% on the day. On the release front, there are no British events on the schedule. The US trade deficit widened, climbing to $53.1 billion and missing the forecast of $52.1 billion. In the US, JOLTS Jobs Openings slowed to 5.81 million, well off the estimate of 5.95 million.
PMI indicators are important gauges of the British economy, and the January reports have all disappointed. Last week, Manufacturing and Construction PMIs slowed in January and missed their estimates. Construction PMI dropped to 50.2, pointing to stagnation in the construction sector. On Monday Services PMI continued to the trend, as the pace of expansion slowed in January. These weaker numbers across the economy are sure to trigger concerns that Brexit is taking its toll on the economy, and the pound is trading below the symbolic 1.40 level.
It’s been a rough week for the pound, which started the week with losses. The US dollar has posted broad gains this week, after a massive sell-off on global stock markets. The sell-off can be attributed to strong US nonfarm payrolls and wage growth reports, which were released on Friday. Investors fear that the sharp data could lead to higher inflation, which in turn would result in more rate hikes this year. Higher interest rates make the dollar more attractive for investors, at the expense of the stock markets. Adding to investors’ concerns, there are expectations that the ECB and possibly the Bank of Japan could raise rates late in 2018, which would push up the euro and yen and weigh on the stock markets.
The Janet Yellen era is over at the Federal Reserve. On the weekend, Jerome Powell took over as chair, replacing Yellen. On Friday, Yellen waxed optimistic about the economy, saying that strong growth, a red-hot labor market and increased wage growth would require the Fed to gradually raise interest rates. Powell is expected to continue to Yellen’s policies, so the markets are not expecting any dramatic shifts. However, the massive US tax cut will have a strong impact on the US economy, and the markets will be looking to the Fed for guidance. If the Fed sounds optimistic about the tax reform package, the US dollar could move higher.
