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Pound Slips as Carney Spooks Markets

The British pound has posted considerable losses in the Tuesday session. In North American trade, GBP/USD is trading at 1.3223, down 0.66% on the day. On the release front, the Bank of England published the results of its bank stress tests and the semi-annual Financial Stability report. In the US, CB Consumer Confidence jumped to 129.5, crushing the estimate of 123.9 points. In Washington, Fed Chair Designate Jerome Powell is testifying at his confirmation hearing before the Senate Banking Committee.

There was positive news from the banking sector on Tuesday, as all seven major UK banks passed the BoE’s stress tests. This is a reliable indication that the banking sector is in decent shape, despite nagging concerns about the toll that Brexit could take the British economy. Still, investors were quick to seize on negative comments from BoE Governor Mark Carney, who warned that in the case of a "disorderly" Brexit, the financial sector would face "some quite material economic costs". Carney’s warning has sent the pound lower on Wednesday. Prime Minister May is expected to improve on its offer for its Brexit divorce bill, which could smooth some feathers in Brussels. Until now, the Europeans had demanded EUR 60 billion, while the UK had countered with EUR 20 billion. Another headache for May is the issue of the border between Northern Ireland and Ireland and its status after Brexit. The DUP party, which is propping up May in parliament, does not want a hard border between Ireland and Northern Ireland. However, if Britain does not remain in a customs union with the EU after Brexit, the result would likely be a hard border, given that there would be different regulatory schemes in Ireland and Northern Ireland.

All eyes are on the Federal Reserve on Tuesday, as Jerome Powell is testifying before the Senate Banking Committee. Investors will be listening closely, as Powell faces questions from lawmakers about his plans as head of the powerful central bank. Powell is widely expected to maintain Janet Yellen’s cautious monetary stance, which has been marked by small, incremental rate hikes. Powell inherits an economy that is in excellent shape, but persistently low inflation remains a nagging problem. Fed policymakers have differing views on what to do about inflation, with some members proposing that the Fed drop its 2 percent target, in favor of a "gradually rising path" for prices. The Fed remains confounded by low inflation and wage growth, despite a labor market that is at full capacity. Still, the Fed will likely pull the rate trigger next month, and could raise rates up to 3 more times in 2018 if the economy continues to expand at its current pace.

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