The British pound has posted gains in the Thursday session. In North American trade, GBP/USD is trading at 1.4247, up 0.41% on the day. On the release front, British Manufacturing Production slowed to 55.3, shy of the estimate of 56.5 points. In the US, employment data was strong, as unemployment claims dropped to 230 thousand, below the forecast of 237 thousand. ISM Manufacturing PMI slowed to 59.1, but still beat the estimate of 58.7 points. ISM Manufacturing PMI slowed to 59.1, but still beat the estimate of 58.7 points. On Friday, the spotlight will be on employment numbers, with the release of wage growth, nonfarm payrolls and the unemployment rate. As well, the US releases UoM Consumer Sentiment.
Britain’s economy is expected to worsen after it departs the European Union, but any worries over the economy are not hurting the British pound, which has enjoyed a strong January. The currency has jumped 5.2% gain in January, as the USD selloff saw the dollar’s rivals post strong gains. Last week, the pound pushed above 1.43, its highest level since June 2016. On the political front, Theresa May is facing strong domestic criticism over her handling of Brexit, and there has even been talk of a no-confidence vote in parliament. For their part, the Europeans are still smarting from Britain’s decision to leave the club, and are not in a giving mood, with barely a year for the sides to reach a trade deal before the Brexit deadline in March 2019.
In the latest Brexit development, the EU has drafted guidelines regarding a transition period after Brexit until December 2020. The European proposal calls for Britain to abide by EU rules, including freedom of movement, during the transition period which would last until 2020. However, on Wednesday, Prime Minister May said that EU citizens arriving in the UK during the transition period would be subject to stricter rules than those living in the UK before Brexit takes effect in March 2019. A strong EU reaction was not late in coming, with Guy Verhofstadt, the European parliament’s Brexit coordinator, stating that the EU would not accept two sets of rights for EU citizens.
There were no major surprises from the Federal Reserve policy meeting, the final one under Janet Yellen’s watch. In the rate statement, policymakers said that they expected the economy to continue to expand at a moderate pace and that the labor market would remain strong in 2018. What caught investor’s attention was that the Fed forecast that inflation would rise this year to the Fed’s target of 2 percent. This marks an upgrade in the inflation forecast, as the December statement said that inflation was expected to “remain somewhat below 2 percent.” Higher inflation is likely to open the door to tighter monetary policy, and the Fed appears on track for three or even four rate hikes in 2018, assuming that the US economy remains strong. This policy meeting was the last under Janet Yellen, as Jerome Powell will take over as Fed chair on February 3. The slightly hawkish tone of the rate statement has raised the odds of a rate hike to 83% when the Fed next meets in March.
