The British pound is almost unchanged in Wednesday trade. In the North American session, the pair is trading at 1.2995, up 0.02% on the day. On the release front, US employment indicators missed their forecasts. Preliminary Nonfarm Productivity gained 0.7%, short of the forecast of 0.9%, while Preliminary Unit Labor Costs came in at 0.6%, well below the estimate of 1.1%. Later in the day, the UK releases the RICS House Price Balance, which is expected to improve slightly to 9%. Thursday will be busy, with key indicators in both the UK and the US. The UK releases Manufacturing Production, which is expected at a flat 0.0%. The US will release PPI, which is expected to remain at 0.1%. The markets are also expecting unemployment claims to remain steady at 240 thousand.
The war of words between North Korea and the US has escalated, and the rising political tensions have sent global stock markets lower. Pyongyang has reacted furiously to new sanctions imposed by Washington, and has threatened to attack Guam, which is a major US military base. President Donald Trump is taking a tough line on North Korea, and has promised that any aggression from North Korea will be met with "fire and fury." With Trump and North Korean President Kim Jong-un on a possible collision course, risk appetite has decreased, as nervous investors have snapped up gold, a traditional safe-haven asset. If the crisis worsens, the pound could take advantage and move higher against the dollar.
The pound continues to lose ground, as GBP/USD has slipped 2.0% since August 3. On Tuesday, the pair dropped below the symbolic 1.30 level, for the first time since July 21, in response to a strong US employment report. The indicator improved to 6.16 million, marking a record high. This follows the strong nonfarm payrolls report on Friday, as the US labor market remains red-hot.
The US dollar has managed to hold its own against the pound, but the greenback is under pressure. Paralysis in Washington is weighing on the dollar, as Donald Trump’s antics and the Republican’s inability to pass a healthcare bill in Congress has increased political risk in the US. As well, the Federal Reserve’s monetary policy remains unclear. Earlier this year the Federal Reserve strongly hinted that it planned to raise rates three times in 2017, but has only pressed the rate trigger twice. In June, Fed Chair Janet Yellen shrugged off low inflation, saying that it was due to "transient" factors, leaving the impression that the Fed still planned one final hike. However, inflation has not improved and the Fed has changed its tune. Last week, St. Louis Federal Reserve President James Bullard said he opposed further Fed hikes, warning that another hike would actually delay inflation from hitting the Fed’s target of 2%. The markets have become more skeptical about a rate hike in December, as the odds have fallen to 34%, compared to 43% a week ago.
