GBP/USD has posted small losses in the Monday session. In North American trade, the pair is trading at 1.3030, down 0.13% on the day. On the release front, it’s a quiet start to the week, with no major events on the schedule. On Tuesday, the US releases JOLTS Jobs Openings, which is expected to edge lower to 5.66 million.
The British pound had a rough week, as GBP/USD slipped 0.09%. The dollar posted broad gains on Friday, as the July nonfarm payrolls report was better than expected. The indicator came in at 209 thousand, easily beating the estimate of 182 thousand. The unemployment rate edged lower to 4.3%, but the positive news was dampened somewhat by wage growth, which remained unchanged at 0.3%. This underscores weak inflation levels, which has left investors skeptical as to whether the Federal Reserve will raise rates one final time in 2017. On Thursday, the pound 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. The City of London, a key European financial center, stands to lose thousands of financial jobs due to Brexit. Deutsche Bank announced that it will move at least 2,000 jobs from its London office to Frankfurt, and RBS has announced that it will relocate its London office to Amsterdam.
With the odds of a December rate hike at less than 50%, 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". Other FOMC members have also come out in favor of the Fed starting to wind up its portfolio this fall.
