The British pound has posted gains for a second straight day. In Wednesday’s North American session, GBP/USD is trading at 1.4207, up 0.40% on the day. On the release front, ADP Nonfarm Payrolls slowed to 234 thousand, but this was much stronger than the estimate of 186 thousand. There was positive news from the housing sector, as Pending Home Sales improved to 0.5%, matching the estimate. Later in the day, the Federal Reserve will release a rate statement, and is expected to hold rates at a range between 1.25% -1.50%. On Thursday, the UK releases Manufacturing Production, while the US will publish unemployment claims and the ISM Manufacturing PMI.
Recent reports have forecast that the British economy will be negatively impacted by Brexit, but someone forgot to tell the bad news to the British pound. The currency has posted a sharp 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 politial front, Theresa May can only wish that her position was as strong as the pound. The May government is facing strong domestic criticism over its handling of the Brexit negotiations, and the Europeans are in no mood to play softball as the Britain departs the European Union in just over a year.
In the latest Brexit development, the EU has drafted guidelines regarding the transition period after Britain leaves the European Union in 2019. 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, it’s unlikely that the May government will simply accede to this proposal. Britain wants a longer transition period as well as say in the makeup of the transition period.
The Federal Reserve will be in the spotlight later on Wednesday, with the release of rate statement, the final one under Janet Yellen’s watch. The tone of the statement could affect investor sentiment and have a substantial impact on the currency markets. It’s a virtual certainty that the Fed will leaves rates unchanged this time around, although it’s likely that the Fed will raise rates by a quarter-point at the March meeting. Yellen will make way for Jerome Powell, who takes over as chair in early February. Powell is expected to hold the course on monetary policy, which was marked by small, incremental interest rates in order to keep the robust US economy from overheating.
