The British pound has posted small losses in the Tuesday session. In North American trade, GBP/USD is trading at 1.3773, down 0.15% on the day. In economic news, British CPI edged down to 3.0%, matching the forecast. In the US, there were no key events on the schedule. The Empire State Manufacturing Index softened to 17.7, missing the forecast of 18.5 points. This marked the weakest reading since June 2017.
Inflation in the UK dipped to 3.0% in December, but that is still much higher than the Bank of England target of 2 percent. The BoE is reluctant to raise interest rates, especially with the uncertainties over Brexit, but high inflation continues to erode the purchasing power of the British consumer. A weak pound has further dampened consumer spending, although a cheaper pound has been a boon for the export sector. The BoE holds its next policy meeting in February, and as matters currently stand, the BoE is not expected to raise rates.
Brexit negotiations have been difficult and progress has been slow, as Europe is not keen on rewarding Britain for departing the European Union. There are serious divisions within the British government with regard to the talks, and Prime Minister May has to walk carefully, as she has a razor thin majority in parliament. May can ill afford any mistakes, and if her government runs into trouble, she may be forced to call elections, which could shake up the markets and send the pound downwards. The public is almost evenly split on whether Brexit is a good idea, and there are serious concerns that the British economy will take a hit, even if a deal is worked out before the March, 2019 deadline. The parties do not have a lot of time to hammer out a host of trade issues, and all indications are that the negotiations road will be bumpy and difficult. One card that Britain may hold is that the EU, which has been united so far in its position on Brexit, may see the unified front fall apart find that some countries try to cut favorable trade deals with Britain.
