The British pound has posted gains in the Tuesday session. In North American trade, GBP/USD is trading at 1.3194, up 0.56% on the day. On the release front, British Manufacturing Production gained 0.4%, above the forecast of 0.2%. The UK trade deficit jumped to GBP 14.2 billion, much higher than the forecast of GBP 11.4 billion. The NIESR GDP Estimate remained unchanged at 0.4%. In the US, there are no major events on the schedule. We’ll hear from FOMC members Neel Kashkari and Robert Kaplan. On Wednesday, the US releases JOLTS Job Openings and the Federal Reserve releases the minutes of the September policy meeting.
Last week was disappointing for the pound which declined 2.4 percent. Weak PMI reports and concern about Theresa May holding onto her job as Prime Minister pushed the pound lower. However, the currency has rebounded this week, gaining 1.0 percent. On Tuesday, the pound received a boost as Manufacturing Production gained 0.4% in August, its second best gain in 2017. As well, the NIESR GDP Estimate for third quarter came in at 0.4%, a notch better than its gain of 0.3% in the second quarter. Despite pessimistic forecasts from the Bank of England, and some analysts, the British economy has weathered the Brexit storm and remains in good shape. However, the Brexit talks have not gone well, and a scheduled negotiation session on Tuesday was cancelled. The Department for Exiting the European Union continues to put on a brave face and insists that the talks have made progress, but European negotiators have sounded less enthusiastic. If significant progress is not made by the end of the year, there will be further pressure on May to take Britain out of the EU without a deal.
The Federal Reserve stayed on the sidelines at its September policy meeting, but the markets are clearly expecting one final rate hike in December. According to CME FedWatch, the odds of a December rate hike are currently at 86%, compared to just 31% a month ago. Why the huge turnaround? A strong US economy has helped raise the odds, but the primary reason for the huge shift in market sentiment can be attributed to the Fed policymakers that have come out in support of a rate hike, notably Fed Chair Janet Yellen. The lack of inflation remains the most significant impediment to raising rates, but Yellen and other FOMC members have insisted that strong economic conditions will lead to higher inflation levels. Even if inflation does not move higher before 2018, the Fed now appears ready to press the rate trigger
