The British pound has posted sharp gains in the Wednesday session. In North American trade, GBP/USD is trading at 1.3295, up 0.95% on the day. On the release front, British Preliminary GDP improved to 0.4%. British High Street Lending and Index of Services both met expectations. US data was sharp, as durable goods orders and housing reports beat the forecasts. Core Durable Goods Orders gained 0.7%, above the estimate of 0.5%. Durable Goods Orders soared 2.2%, crushing the estimate of 1.0%. As well, New Home Sales jumped to 667 thousand, well above the forecast of 555 thousand. On Thursday, the US releases unemployment claims and Pending Home Sales.
British GDP showed the economy expanded 0.4% in the third quarter, its strongest gain since Q4 in 2016. The strong reading has sent the pound sharply higher and raised speculation that the Bank of England will raise rates at its November 2 meeting. Policymakers remain divided over a rate hike, which would be the first in a decade. Proponents of a rate increase point to inflation running at 3.0%, above the Bank’s target of 2.0%, but opponents argue that the economy is showing signs of weakness and a rate hike in current conditions would be not be appropriate.
Who will take over at the Federal Reserve? The markets are keeping close tabs on the central bank, as Janet Yellen’s 3-year term expires in February. President Trump has said he will nominate a new Fed head in the coming days, and the front runners are economist John Taylor and Federal Reserve Governor Jerome Powell. Taylor advocates a rule in which interest rates could be as high as 3 percent, given current economic conditions. Powell is more closely aligned to Fed Chair Janet Yellen’s monetary stance which advocates an incremental increase in rates. With the two candidates representing sharply differing views on interest rate levels, Trump’s choice for the new Fed chair could have an effect on monetary policy and the strength of the US dollar. Still, most economists are of the view that monetary policy will be largely driven by the performance of the US economy. Inflation levels remain weak and may not reach Fed’s target of 2 percent before 2020, but that has not dampened expectations of a December rate hike. According to CME FedWatch, the odds of a raise in December stand at 96 percent.
