The British pound has posted sharp losses in the Wednesday session. In North American trade, GBP/USD is trading at 1.3784, down 0.90% on the day, after London reacted angrily to an EU draft Brexit agreement. In economic news, there are no British events on the schedule. In the US, Preliminary GDP for Q4 came in at 2.5%, matching the forecast. Housing data continues to be a concern, as Pending Home Sales declined 4.7%, well off the estimate of 0.4%.
Tensions between the May government and the EU ratcheted up on Wednesday, after the EU published a draft of a legal framework after Brexit. Two items in the EU draft have raised the ire of London. First, the proposal that EU would keep Northern Ireland in the bloc’s customs union, with a border between the north and the UK. Second, that the European Court of Justice (ECJ) would have the final say in any disputes over the Brexit agreement. May wasted no time responding to the EU proposal, saying a customs union between the UK and Northern Ireland would threaten the constitutional integrity of the United Kingdom. May is unlikely to accept a role for the ECJ after Brexit, as this would be seen as undermining British sovereignty. Meanwhile, the Europeans dismissed May’s proposal that a final trade deal would allow some divergence with EU regulations in certain industries, but the Europeans have dismissed this as ‘cherry picking’, which they say is a non-starter. May will lay out her post-Brexit vision of relations with the EU in a speech on Friday and if the Europeans pour cold water on her plan, the markets could react negatively.
Federal Reserve Chair Jerome Powell sounded hawkish in his testimony before a congressional committee on Tuesday. Powell was cautious, saying that the Fed planned to continue its current policy of gradual rate increases, despite the stimulus of government spending and recent tax reform. Powell sounded optimistic about economic conditions, noting that the US economy was benefiting from the global recovery as well as changes in fiscal policy. Importantly, Powell did not address the question of an acceleration of rate hikes. Currently, the Fed has projected three rate hikes in 2018, with increases widely expected at the March and May meetings. However, with inflation moving higher and the economy continuing to perform well, many analysts expect the Fed to raise rates four or more times this year. Any hints at an increased pace of rate hikes could send the US dollar broadly higher.
