The British pound has posted slight gains on Wednesday, erasing the losses which marked the Tuesday session. Currently, GBP/USD is trading at 1.3281, up 0.33% on the day. On the release front, British Services PMI improved to 53.6, above the estimate of 53.2 points. In the US, there are two key indicators on the schedule. ADP Nonfarm Payrolls , the first of this week’s job reports, is expected to slow to 131 thousand. The ISM Nonfarm Manufacturing PMI is forecast to edge up to 55.5 points. We’ll also hear from Federal Reserve Chair Janet Yellen, who will deliver remarks at an event hosted by the St. Louis Fed. On Thursday, the US releases unemployment claims, which is expected to drop to 266 thousand.
British Services PMI managed to beat its estimate, but the construction and manufacturing PMIs both slowed down in September, raising questions about the health of the British economy ahead of the dark cloud of Brexit. Construction PMI was a huge disappointment, falling to 48.1 points. The reading pointed to contraction in the construction sector for the first time since August 2016, shortly after the Brexit vote. Manufacturing PMI slipped to 55.9 in September, down from 56.9 points a month earlier. Although this indicates expansion, the indicator missed expectations, and investors could become nervous and sell their pound assets. The soft PMIs could also affect the BoE’s interest rate plans. The BoE has broadly hinted that it will raise rates in the near future, with low unemployment and high inflation the main arguments for raising rates. However, if economic indicators continue to point downwards, policymakers will have to carefully consider if the economy is strong enough to absorb a rate hike.
Prime Minister May’s Conservatives are wrapping up a party conference, and to the surprise of some analysts, there were no fireworks to report at the gathering. Ahead of the meeting, there had been speculation that May would face a challenge to her leadership from foreign secretary Boris Johnson. However, all seems calm, at least for now, and Johnson has said he fully supports May. The Conservatives are still smarting from a disastrous election in June, with May being blamed for running a lackluster campaign. She has also zigzagged on Brexit, and has recently toned down her rhetoric, notably with a conciliatory speech in Florence. Still, the Brexit talks have been difficult, with little progress to report after several rounds of negotiations. Key sticking points between Britain and the European Union include the amount that Britain will pay upon leaving, whether the European High Court will have jurisdiction over EU citizens living in Britain, and the border with Ireland. There is also discussion about a transition period, which British businesses argue is crucial for a smooth shift to the post-Brexit era.
Will the Federal Reserve press the rate trigger one final time in 2017? Just a few weeks ago, federal futures had priced in a December hike at below 50 percent, but the odds have surged to 76 percent, according to the latest CME Fed Watch release. Although FOMC members remain divided on the prudence of another rate hike in 2017, Fed Chair Janet Yellen has broadly hinted that she favors a December move, and the markets have picked up on her message. The US economy continues to perform well, and the labor market remains close to capacity. The Achilles heel in an otherwise strong economy is inflation, which remains well below the Fed’s target of 2 percent. If sentiment towards a December hike remains high, the US dollar will be attractive to investors and could gain ground.
