The British pound has dropped lower in the Tuesday session, and the currency could be headed for a third straight losing session. In North American trade, GBP/USD is trading at 1.3422, down 0.33% on the day. On the release front, there are no major UK events. British High Street Lending, which measures house mortgage lending, edged upwards to 41.8 thousand, just above the forecast of 41.7 thousand. In the US, key indicators missed their estimates. CB Consumer Confidence dipped to 119.8, shy of the estimate of 119.9 points. On the housing front, New Home Sales slowed to 560 thousand, well off the forecast of 585 thousand. Later in the day, Fed Chair Janet Yellen will speak at an event in Cleveland. On Wednesday, the US will release Core Durable Goods Orders and Pending Home Sales.
The Brexit negotiations have become tangled and fractious, so it was no surprise that European Council President Donald Tusk admitted that the sides had not made enough progress to move to trade discussions. The European Union has conditioned trade talks on "sufficient progress" being made on areas such as the amount of Britain’s bill to leave the EU, the legal status of EU citizens living in the UK and the border between the UK and Ireland. The two sides remain far apart on these key issues, so it appears that the May government will have little choice but to move closer to the European position before it can talk about the nature of trade relations between Europe and the UK in the post-Brexit era. Adding to the uncertainty, the British government itself is divided. Hawkish cabinet members, such as foreign secretary Boris Johnston, have consistently put forward a harder line towards the Europeans than Prime Minister May.
The Bank of England remains worried about the British economy. On Monday, the Bank’s FPC statement on Monday 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%.
The markets are having a tough time pinning down whether the Federal Reserve plans to raise rates on final time in 2017. With policymakers sending out mixed messages, 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 percent 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. Commenting on the decision to taper the balance sheet, FOMC member John Williams said on Friday that he did not "anticipate any sudden or large effects on rates or spreads", but acknowledged that the Fed could not predict how the markets would react, and policymakers would have to monitor market reaction to the reduction in the balance sheet.
