GBP/USD has edged lower in the Thursday session. In North American trade, GBP/USD is trading at 1.2520. On the release front, the BoE released its quarterly credit conditions survey. It was a busy day in the US which released three key indicators – PPI, Unemployment Claims and the UoM Consumer Sentiment. PPI missed its estimate, but unemployment claims and consumer confidence both beat expectations.
Earlier this week, Federal Reserve Chair Janet Yellen expressed satisfaction with economic conditions. Given that the economy is close to full employment and the Fed’s inflation target of 2 percent, Yellen said that the Fed was in a better position to reduce its support for the economy. The minutes of the March meeting indicated that the Fed plans to trim the $4.5 trillion balance sheet, which has ballooned as a result of the huge asset-purchase program which started in response to the financial crisis in 2008. Yellen emphasized that the Fed’s policy stance is neutral, as interest rate increases will be gradual, given that the economy is growing at a moderate pace. What can we expect from the Fed for the remainder of 2017? The Fed is widely expected to raise rates twice more in 2017, with the next rate expected in June. At the same time, some Fed policymakers are in favor of three more rate hikes, which would bring the total this year to four moves.
The pound has posted gains against the US dollar this week, as risk appetite has diminished due to geopolitical tensions. Investors remain cautious over developments in Syria and North Korea. The US bombed a Syrian military base last week, in response to a chemical attack by Syrian warplanes. Russia has strongly condemned the US move, chilling relations even further between the US and Russia. President Trump has also sent warships to the Korea peninsula, in a show of strength against North Korea, which continues to test ballistic missiles in defiance of the international community. Also, Donald Trump said in a newspaper interview on Wednesday that the value of the US dollar was too strong and that he was in favor of a low interest rate policy. Trump’s comment sent the dollar lower against its major rivals, including the pound.
After months of legal wrangling, the British government triggered Article 50 at the end of March, officially ushering in the negotiations stage of the Brexit process. However, Britain and the EU are unlikely to commence talks until late in 2017, given that Germany holds elections in September, and the EU will not enter the complex negotiations until a new German government is in place. It’s anyone’s guess as to how smooth the talks will go, and the fate of the pound could be closely tied to the talks. If the negotiations go well, the pound could recover up to $1.50, its level on the eve of the stunning Brexit vote back in June. On the other hand, if the talks do not go well, analysts are forecasting that the pound could drop as low as $1.10. With the BoE in a neutral stance as far as interest rate policy, the fortunes of the pound appear more closely tied to the success of the Brexit negotiations, rather than to any monetary moves by the BoE.
