GBP/USD has posted slight gains on Wednesday, continuing the upward movement which marked the Tuesday session. In North American trade, the pair is trading just above the 1.2630. On the release front, British Manufacturing PMI came in at 55.9, matching the forecast. ADP Nonfarm Payrolls sparkled with a gain of 246 thousand, well above the forecast of 165 thousand. ISM Manufacturing PMI improved to 56.0, beating the forecast of 55.0. Later in the day, the Federal Reserve issues a rate statement and set the benchmark rate, which is expected to remain pegged at 0.50%. On Thursday, it’s a very busy day in the UK. Construction PMI is the first order of business, followed by the BoE, which will publish its inflation report and set the benchmark interest rate. The US will release unemployment claims.
British inflation indicators jumped in the second half of 2016, boosted by a weaker pound which crashed as much as 20% after the Brexit vote in June. Still, the BoE appears in no rush to raise interest rates, at least for now. The bank is expected to maintain rates at 0.25%, where they have been pegged since last July. Analysts will be combing through the BoE inflation report, which could provide hints about future interest rate moves. The British economy continues to perform well despite tensions with Europe over Brexit. On Tuesday, Manufacturing PMI indicated expansion in the manufacturing sector, and this week’s Construction and Services PMIs are expected to follow suit and point to expansion.
All eyes are on the Federal Reserve, which will release a policy statement later on Wednesday. After a historic quarter-point raise in December, which pushed rates to 0.50 percent, the Fed is expected to remain on the sidelines in its first release of 2017. What happens next? Just a few weeks ago, Fed officials were talking about a series of rates hikes in 2017 in response to a strong US economy (sound familiar? Please rewind to January 2016 for an identical message). However, after just 10 days on the job, President Trump has proven to be as unpredictable and controversial as ever. Trump has not provided any details about his economic blueprint for the country, but he has raised the rhetoric about "America first" and has already picked a fight with Mexico over a border wall and his threat to renegotiate the NAFTA trade agreement. After hinting at gradual rate increases, the Fed will likely change gears and adopt a wait-and-see attitude, watching what bills Trump gets through Congress and how the economy responds. If economic growth remains strong, a rate hike in the first half of 2017 will have to be seriously considered by the Fed. The markets have priced in a rate hike by June at 66 percent.
