The British pound has posted small gains in the Tuesday session. In North American trade, GBP/USD is trading at 1.3484, down 0.08% on the day. On the release front, the sole UK indicator was the 30-y bond yield. Over in the US, housing data was positive. Building Permits jumped to 1.30 million, well above the forecast of 1.22 million. Housing Starts improved to 1.18 million, edging above the forecast of 1.17 million. On Wednesday, the UK releases Retail Sales and the US Federal Reserve will wind up its policy meeting and release a rate statement.
Bank of England Governor Mark Carney has made no secret of his grave concerns over Brexit, and he reiterated these worries on Monday at a speech at the International Monetary Fund in Washington. Carney said that Britain’s loss of its trade relationship with the European Union would push inflation higher and slow growth, and labeled Brexit as "an example of de-globalisation, not globalisation." Pro-Brexit supporters have been unhappy with Carney’s stance on Brexit, arguing that high inflation in the UK is a result of the BoE’s stimulus program and ultra- low interest rate policy, rather than Brexit. Carney also hinted at a rate hike, saying that monetary policy "would have to move". The pound jumped 3.0% last week, after the minutes of the BoE’s policy meeting strongly hinted at a rate hike before the end of the year. This has led to speculation that the BoE could raise rates for the first time in a decade at the November 2 policy meeting.
The Federal Reserve will be front row and center on Wednesday. There is virtually no chance that the benchmark rate of 1.25% will change, so the markets are focusing on the Fed’s bloated balance sheet, which currently stands at $4.2 trillion. Earlier in the year, the Fed outlined plans to reduce the balance sheet by not replacing some maturing bonds, starting at $10 billion/month, and gradually moving higher. This move can be viewed as a mini-rate hike, and could provide a boost for the US dollar against its major rivals. The markets will also be keeping a close eye on the tone of the rate statement, as an optimistic view of the US economy could boost the greenback. Will the Fed provide any hints about one last rate hike in 2017? The Fed is still debating whether it will raise rates in December, as persistently low inflation has hampered plans for a third rate hike in 2017. However, the odds of a December increase have been moving higher in September, and are currently at 56%.
