The British pound has posted gains in the Tuesday session, continuing the upward movement seen on Monday. In North American trade, GBP/USD is trading at 1.3275, up 0.52% on the day. On the release front, British GfK Consumer Confidence came in at -10, matching the estimate. In the US, key indicators were sharp. CB Consumer Confidence jumped to 125.9, well above the forecast of 121.1 points. Chicago PMI improved to 66.2, its highest level since March 2011. On Wednesday, the UK releases Manufacturing Production. In the US, there are two key events – ADP Nonfarm Payrolls and ISM Manufacturing PMI. As well, the FOMC will release its monthly rate statement.
The pound has started off the week in strong form, gaining 1.4 percent. The currency ignored a weak GfK Consumer Confidence report, as the markets have priced in a 90% likelihood that the Bank of England will raise rates on Thursday, for the first time since 2007. However, BoE policymakers remain divided on a rate hike, and both sides can point to economic data to make their case. Inflation is running close to 3 percent, and a rate hike would help curb inflation and bring it closer to the BoE target of 2%. Opponents of a hike point to an economy that has softened in recent months and argue that a rate hike would raise the pound, hurting exports. At the end of the day, a rate hike of 25 basis points should not have a huge effect on the economy, but the sheer significance of the move could boost the pound against the greenback.
The Federal Reserve is also in focus this week, with the release a rate statement on Wednesday. The Fed is not expected to raise rates, so analysts will be combing through the rate statement, looking for clues about future rate moves. The markets have priced in a December rate hike at whopping 96 percent, and the markets are focusing on what the Fed has planned for 2018. This will depend, of course, on the new head of the Fed, who will take over from Janet Yellen in February. The two front-runners, John Taylor and Jerome Powell, have very different stances on monetary policy, which has created some suspense ahead of President Trump’s nomination. Trump is expected to choose the new head before departing for Asia at the end of the week. Powell is expected to continue Yellen’s incremental approach to raising rates, while Taylor is a proponent of much higher rates, as underscored in his "Taylor Rule", which calls for higher rates when inflation is high or the labor market is at full capacity.
