Fundamental Analysis

Pound Edges Lower, BoE Sends Warning Over Consumer Lending Levels

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The British pound has dropped lower in the Monday session. In North American trade, GBP/USD is trading at 1.3452, down 0.34% on the day. On the release front, the Bank of England released the Financial Policy Committee statement. There are no US economic releases, but there are three FOMC members holding speaking engagements – William Dudley, Charles Evans and Neel Kashkari. On Tuesday, the US releases CB Consumer Confidence and New Home Sales. Federal Chair Janet Yellen will speak at an event in Cleveland.

The Bank of England remains worried about the British economy, and the FPC statement took aim at the British consumer, specifically credit levels. The BoE warned that unsecured consumer lending was growing at close to 10 percent each year, far outstripping income, and called on British banks to carry an extra GBP 10 billion to protect against consumer loan defaults. Although defaults were not currently a problem, the FPC statement expressed concern that in an economic downturn, defaults could spiral and hurt the banking sector. In August, the BoE forecast that the economy would slow down in 2018, with Brexit one of the contributing factors. At the BoE policy meeting earlier this month, the Bank hinted that it would raise interest rates, sending the pound sharply higher. The markets are taking the bank at its word – the odds for a November rate hike have jumped to 42%, up from just 18% just prior to the September rate statement, while the likelihood of a December increase is at 54%.

Federal Reserve policymakers have been divided over a rate hike in December, which would mark a third rate increase in 2017. With no clear message from the Fed, the markets really don't know what to expect, and fed futures have priced in a December hike at 55%. On Monday, New York Fed President William Dudley made a strong case to raise rates. Dudley cited a soft US dollar and strong global growth as reasons why inflation would increase and also translate into stronger wage growth. Dudley said he expects inflation to reach the Fed's target of 2% in the "medium term", and predicted that the Fed would continue to gradually remove monetary accommodation. In last week's rate statement, the Fed announced that it would reduce its $4.2 trillion balance sheet by $50 billion/mth, starting in October.

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