The British pound has posted slight losses in the Wednesday session. In North American trade, GBP/USD is trading at 1.3266, down 0.20% on the day. On the release front, British Manufacturing PMI improved to 56.3, above the estimate of 55.8 points. In the US, ADP Nonfarm Payrolls surged to 235 thousand, crushing the estimate of 202 thousand. On the manufacturing front, ISM Manufacturing PMI slowed to 58.7, missing the forecast of 59.5 points. Today’s highlight is the FOMC rate statement, with no change expected in the benchmark interest rate. On Thursday, the Bank of England is expected to raise interest rates to 0.50%. The UK releases Construction PMI and the US will publish unemployment claims.
Central banks are in focus this week, beginning with the Federal Reserve later on Wednesday. The Fed is widely expected to maintain the benchmark rate at 1.25%, but the rate statement could provide clues about future rate policy. The markets have priced in a December rate at 98.5%, which would mark a third rate for 2017. With a December rate hike a given, barring a meltdown in the US, what can we expect in 2018? That depends to a large degree on the new chair of the Fed. Janet Yellen will wind up her 3-year term in February, and she is not expected to be reappointed by President Trump. The front runner is Jerome Powell, who would likely follow Yellen’s current policy of gradual, incremental rates. Another candidate is economist James Taylor, who is a proponent of much higher rates – his "Taylor Rule", which calls for higher rates when inflation is high or the labor market is at full capacity. Trump is expected to make his choice on Thursday, ahead of his trip to Asia.
The BoE will take center stage on Thursday, but unlike the Fed, the BoE is expected to raise rates at its policy meeting. A rate hike of 25 basis points would raise rates to 0.50%, and would mark the Bank’s first rate increase since 2007. Investors have stayed on the sidelines on Wednesday, and shrugged off a strong Manufacturing PMI, which could have been a catalyst for purchasing pounds. Bank policymakers are in a quandary with regard to rate policy. Inflation is running well above the Bank’s target of 2 percent, which has eroded consumer spending. As well, a labor market that is close to capacity is a reason in favor of raising rates. However, economic growth has slowed and there are fears that Brexit will take a toll on the British economy. The deadlock in the Brexit negotiations has done nothing to calm these concerns, as investors and the business community are becoming increasingly frustrated with the government’s lack of a coherent policy regarding Brexit. At the end of the day, a quarter-point rate hike should not have a huge effect on the economy, but the psychological significance of the move could boost the pound against the US dollar.
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.
