The British pound continues to head lower this week, and has posted losses in the Wednesday session. In North American trade, GBP/USD is trading at 1.3407, down 0.38% on the day. On the release front, British CBI Realized Sales soared with a reading of 42, crushing the estimate of 6 points. In the US, data was mixed. Durable Good Orders sparkled with a 1.7% gain, well above the estimate of 1.0%. Core Durable Goods slowed to 0.2%, matching the estimate. Pending Home Sales was unexpectedly soft, posting a decline of 2.5%, compared to an estimate of -0.5%. On Thursday, BoE Governor Mark Carney will speak at a BoE conference in London. The US will release two key events – Final GDP and unemployment claims.
Federal Reserve policymakers remain divided on the hot issue of another rate hike in 2017. Fed Chair Janet Yellen waded into the rate debate on Tuesday, as she sent out a surprisingly hawkish message to the markets. Yellen said that she favored gradual rate increases, and voiced confidence that inflation levels would move higher. She added that if the Federal Reserve did not continue to raise rates, the red-hot labor market could become overheated, potentially causing a recession. On Monday, New York Fed President William Dudley also made a strong case to raise rates. Dudley cited a soft US dollar and strong global growth as reasons why inflation would increase and also translate into stronger wage growth. Dudley said he expects inflation to reach the Fed’s target of 2 percent in the "medium term", and predicted that the Fed would continue to gradually remove monetary accommodation. However, Chicago Fed President Charles Evans sent out a very different message, calling on the Fed to avoid another rate hike until wage and inflation levels moved higher. Evans said that inflation, which is running at around 1.4%, is too low, and wants to see "clear signs" that prices are moving higher before the Fed presses the rate trigger. For their part, the markets are more confident in a December move – the CME Group has pegged the odds of a December raise at 81%, while the odds were mired below 50% just a few weeks ago.
The Brexit saga continues, as negotiations between Britain and the European Union have been testy and tense, with little headway on a range of issues that must be resolved as part of the divorce process. Given this background, it was no surprise that European Council President Donald Tusk acknowledged on Tuesday that the two sides had not made enough progress to move to trade discussions. The May government is eager to discuss trade relations with Europe in a post-Brexit era, but the EU has conditioned trade talks on "sufficient progress" being made regarding the amount of Britain’s bill to leave the EU, the legal status of EU citizens living in the UK and the border between the UK and Ireland. The two sides remain far apart on these key issues, so it appears that the May government will have little choice but to move closer to the European position before it can talk trade. Adding to the uncertainty, the British government itself is divided on its Brexit policy. Hawkish cabinet members, such as foreign secretary Boris Johnston, have consistently put forward a harder line towards the Europeans than has Prime Minister May, and it’s difficult to see how negotiations can move forward before the May gets her own house in order.
