GBP/USD has dropped considerably in Thursday trade. In the North American session, the pair is trading at 1.3140, down 0.63% on the day. On the release front, the Bank of England maintained interest rates at 0.25%, but also lowered its 2018 forecast for GDP and wage growth. Elsewhere, UK Services PMI improved slightly, with a reading of 53.8 points. This beat the forecast of 53.6 points. In the US, unemployment claims edged lower to 240 thousand in July, beating the estimate of 242 thousand. ISM Non-Manufacturing slowed down to 53.9, compared to the estimate of 57.4 points. This reading was well below the forecast of 56.9 points. On Friday, the US releases wage growth and non-farm payrolls, so traders should be prepared for some movement from GBP/USD.
After touching 11-month highs on Wednesday, the pound has reversed directions and erased this week’s gains. The currency reacted negatively as the BoE cut its growth forecasts for 2017, from 1.9% in May to 1.7%, and for 2018, from 1.7% to 1.6%. As well, the bank sharply cut lowered its wage growth forecast for 2018, from 3.5% to 3.0%. The BoE held rates at 0.25%, but the minutes from the policy meeting were dovish, with MPC members warning that "GDP growth had been sluggish and was expected to remain so in the near term." The BoE’s pessimistic message has dashed hopes of a rate hike before the end of the year, although the bank suggested that a slight improvement in growth could lead to a rate hike in 2018. BoE policymakers have publicly argued about monetary policy, and the vote at Thursday’s meeting, 6 members favored holding rates, while only 2 members voted to raise rates. The British economy has slowed down, but the bank is reluctant to raise rates when inflation is running at 2.6%, well above the bank’s target of 2%. To complicate matters, the Brexit talks have made little progress, raising fears of a messy exit from the EU, which could take a serious toll on the British economy.
Earlier in the year, the Federal Reserve all but promised to raise interest rates three times in 2017. However, the Fed has pressed the rate trigger only twice, and a third hike remains in doubt, with current odds under 50%. Inflation has remained stubbornly low, despite a strong labor market. In June, Fed Chair Janet Yellen said that factors causing weak inflation were "transient", but there are no signs that inflation will pick up anytime soon. With the Federal Reserve unlikely to raise rates before December, investor attention has shifted to the Fed’s balance sheet, which stands at $4.2 trillion. Fed policymakers have broadly hinted at reducing purchases of bonds and securities starting in September, but San Francisco Fed President John Williams was more forthcoming about the Fed’s plans, likely aimed at giving notice to the markets. In a speech on Wednesday, Williams said that the economy had "fully recovered" from the 2008 financial crisis and called on the Fed to start trimming the balance sheet "this fall". Williams added that the process would be gradual and would take four years to reduce the balance sheet to a "reasonable size". On Wednesday, two other FOMC members also came out in support of starting to taper the balance sheet – St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester.
