The British pound has inched lower in the Thursday session. In North American trade, GBP/USD is trading at 1.3745, down 0.11% on the day. In economic news, British Manufacturing PMI ticked lower to 55.2, just above the estimate of 55.1 points. In the US, Personal Spending slowed to 0.2%, matching the forecast. Unemployment claims dropped to an impressive 210 thousand, well below the estimate of 222 thousand. Next up, Fed chair Jerome Powell testifies before the Senate Banking Committee. On Friday, the US publishes UoM Consumer Sentiment. In the UK, Brexit will be in focus, as Prime Minister May speaks about Britain’s departure from the EU. As well, Britain releases Construction PMI and Mark Carney will address a conference in Edinburgh.
Are the Brexit talks about to hit the rocks? The pound took a dip on Wednesday, after the EU published a draft of the legal framework of the Brexit agreement. The May government responded by saying it could not accept the draft. Two items in particular have raised the ire of London. First, the proposal that EU would keep Northern Ireland in the bloc’s customs union, which could mean a border between Northern Ireland 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 that any type of border 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 pound could continue to lose ground.
Jerome Powell will be on center stage on Thursday, as he testifies before the Senate Banking Committee. Powell addressed the House Finance Committee on Tuesday, and his remarks were decidedly hawkish. Fed chair said that the current policy of gradual rate increases would continue. He added that the economy was strong and that he expected inflation to move up to the Fed target of 2 percent. Importantly, Powell did not address the question of an acceleration of rate hikes, but his hawkish stance has increased the likelihood that the Fed will increase it projection from three to four rate hikes this year. Any hints that Fed will quicken its pace of rate hikes would be bullish for the US dollar.
