GBP/USD has posted slight gains in Wednesday trade. In the North American session, the pair is trading at 1.3050, up 0.19% on the day. On the release front, British Preliminary GDP edged up to 0.3% in the second quarter, matching the forecast. In the US, New Home Sales remained steady at 610 thousand, short of the estimate of 615 thousand. Later in the day, the Federal Reserve releases its rate statement and is expected to maintain the benchmark at 1.25%. On Thursday, the US will release two key indicators – Unemployment Claims and Core Durable Goods Orders.
There were no surprises from British Preliminary GDP in the second quarter, which gained 0.3%, compared to 0.2% in the first quarter. This follows first quarter growth of 0.3%. Government statisticians are saying that the economy experienced a "notable slowdown" in the first half of 2017. Although the services sector expanded by 0.5% in the quarter, construction declined 0.9% and manufacturing dropped 0.4%. The soft numbers have dampened expectations for a rate hike from the Bank of England. Policymakers have engaged in a public debate about rate policy, but a second straight quarter of low growth will be ammunition for those policymakers who are against a rate hike before 2018. Although economic expansion remains weak, inflation levels are higher than the BoE would like, courtesy of a weak British pound. The currency’s woes have also hurt the British consumer, who has seen her purchasing power reduced.
The Federal Reserve will be in the spotlight later on Wednesday, as it concludes its monthly policy meeting and releases a rate statement. The Fed is not expected to alter its interest rate policy, but the rate statement could still be a market-mover. The rate statement will be under careful scrutiny, as analysts will be looking for any references to the "I" word. Inflation continues to hover around 1.4% (based on the Fed’s calculations), well below the Fed target of 2%. In June, Janet Yellen described low inflation as "transitory", but recent comments from Yellen and other policymakers have shifted in tone, an apparent acknowledgment that inflation may remain stuck at low levels. This has raised doubts as to whether the Fed will indeed raise rates one more time this year. No move is expected before December, and the odds of a December hike have fallen to just 37%, according to the CME Group. If today’s rate statement fails to reassure the markets that a December hike is planned, investors could respond by selling dollar-denominated assets in favor of other currencies or gold.
Another key issue on the Fed’s agenda is when to begin tapering the Fed’s $4.2 trillion bond portfolio. The bloated balance sheet is a result of the aggressive quantitative easing program which was put in place after the financial crisis in 2008. In June, the Fed outlined plans to taper purchases, with experts circling September as the start date of the reduction. This would involve the Fed tapering the purchases of Treasury bonds and mortgage securities, with an initial taper likely of $10 billion/month. Analysts expect the taper to begin in September, so we could see the Fed make reference to this in the July statement.
