The British pound has posted gains in the Tuesday session. In North American trade, GBP/USD is trading at 1.3981, up 0.50% on the day. The pound is closing on the symbolic 1.40 level, and is at a 2-week high. In economic news, the sole British release is the annual budget. In the US, CPI and Core CPI both slowed to 0.2%. On Wednesday, the US releases key inflation and consumer spending reports.

The markets are keeping a close eye on the Federal Reserve, which holds its next policy meeting next week. The Fed is widely expected to raise rates for the first time this year, but the real question is how many hikes we’ll see in 2018. The Fed projection remains at three rate hikes, but strong economic data, especially from inflation indicators, could push the Fed to raise its forecast. Higher US interest rates makes the greenback more attractive to investors, so the number of rate hikes could have a strong impact on the currency markets.

Are Britain and the European Union heading towards a showdown? Last week, Donald Tusk, president of the European Council, advised Prime Minister May to “pink’ her red lines on Brexit, if Britain wants to maintain a close economic relationship with the bloc. May has insisted that there will be no customs union, and the European Court of Justice will have no jurisdiction over the UK. May set out these positions after the EU published its draft negotiating guidelines for Brexit, and the guidelines warned of “negative economic consequences” if Britain does not soften its position. Tusk added that he does not want to build a wall with Britain, and the EU could offer Britain a free trade agreement, with zero tariffs. At the same time, Tusk warned that Brexit will make trade between the two sides “complicated and costly” and the EU would not allow Britain to cherry pick in any future trade arrangement. EU members are expected to sign off on the negotiating guidelines at a summit in late March, which could trigger a nasty response from the May government.

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