The British pound has posted sharp losses in the Thursday session. In North American trade, GBP/USD is trading at 1.3090, down 1.18% on the day. On the release front, the Bank of England raised interest rates to 0.50%, up from 0.25%. British Construction PMI improved to 50.8, above the forecast of 48.3 points. In the US, today’s highlight is unemployment claims, which dropped to 229 thousand. This beat the estimate of 235 thousand. The focus will be on employment numbers on Friday, as the US releases Average Hourly Earnings, Nonfarm Payrolls and the unemployment rate. We’ll also get a look at ISM Nonfarm Manufacturing PMI.
The BoE raised rates for the first time in a decade on Thursday. Although interest rate hikes generally boost the local currency, the precise opposite occurred, as the British pound has plunged 1.3 percent on the day. The reasons? The markets are treating today’s move as a dovish rate, as the BoE indicated that any additional hikes would be gradual and dependent on Brexit. The rate hike reversed the rate cut back in August 2016, which was an "emergency cut" which the cautious BoE implemented to cushion the economy following the stunning Brexit vote in June 2016. As well, the Bank has been signaling for months that it planned to raise rates, so the markets had plenty of time to price in today’s rate hike.
The Federal Reserve rate statement was expected to be little more than a run-up to the December rate decision, and indeed there were no surprises from Janet Yellen and Co. The Fed indicated that a rate increase is very likely at the December meeting, and was careful not to change any of the wording in its statement regarding future rate hikes. The rate statement noted that hurricanes which hit the US had caused a decline in payrolls in September, but the Fed did not expect the hurricanes to "materially alter the course of the national economy over the medium term." The markets are expecting a strong rebound in nonfarm payrolls – the forecast for Friday’s US nonfarm payrolls is a robust 311 thousand, after a decline of 33 thousand in September. Still, wage growth, which was remained soft despite the strong economy, is expected to slow to 0.2 percent, as inflation remains the Achilles heel of a robust US economy.
With fed futures prices in at 96 percent, a December rate hike from the Fed appears a done deal. What can we expect in 2018? This will depend to a large degree on the new chair of the Fed, who will take over from Janet Yellen in February. 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 economist Jerome Powell, who is expected to maintain the Fed’s current policy of small, incremental rates. Trump is expected to make his choice later on Thursday, and the markets could react once the new Fed chair is announced.
