The British pound has posted considerable gains in the Tuesday session. In North American trade, GBP/USD is trading at 1.3027, up 0.76% on the day. On the release front, British Services PMI eased to 53.2, short of the estimate of 53.5 points. US Factory Orders in July declined 3.3%, matching the estimate. Still, the tumble marked the sharpest decline since August 2014. Federal Reserve member Lael Brainard spoke earlier in the day, and two other FOMC members, Neel Kashkari and Neel Kashkari, will be delivering remarks later in the day. On Wednesday, the US releases ISM Non-Manufacturing PMI, with an estimate of 55.5 points.
Last week’s disappointing US employment numbers wasn’t lost on the Federal Reserve, and FOMC member Leal Brainard sounded pessimistic on Tuesday. Brainard noted that inflation remained "well short" of the Fed’s target of 2%, and counseled caution before raising interest rates until inflation is on its way upwards. Brainard acknowledged the rebound in the US economy, saying that the economy was on "solid footing". A December rate hike remains very much in doubt, with odds of an increase at just 30%. With the likelihood of a rate hike pegged at less than 2% at next week’s policy meeting, the markets will be focusing on the Fed’s balance sheet, which stands at $4.2 trillion. Earlier in the year, the Fed outlined plans to reduce the balance sheet, and analysts expect further details at the September meeting.
Geopolitical tensions often move the currency markets, so the crisis in North Korea is being carefully monitored. On Monday, North Korea’s announcement that it had exploded a hydrogen bomb which could be fitted to an intercontinental ballistic missile. Although the claim has yet to be verified by Western analysts, it is clear that this nuclear device test has ratcheted tensions between North Korea and the US, Japan and South Korea. The International Atomic Energy Authority responded by labeling North Korea as a ‘global threat’, and US President Trump announced on Tuesday that he would increase weapon sales to Japan and South Korea. As tensions between Washington and Pyongyang have increased, the drop in risk appetite is driving investors to the safe-haven yen. If the crisis in the Korean peninsula continues, the US dollar could lose ground against the pound and other major currencies as nervous investors look for alternatives to the greenback.
