GBP/USD has posted losses in the Tuesday session. In the North American trade, GBP/USD is trading at 1.2430. On the release front, British Construction PMI dipped to 52.2, missing the estimate of 52.5 points. In the US, the trade deficit narrowed to $43.6 billion, better than the forecast of $46.0 billion. On Wednesday, all eyes will be on the Federal Reserve, which will publish the minutes of its March policy meeting. As well, the US will release ADP Employment Change and ISM Non-Manufacturing PMI. The UK will release Services PMI.
Britain has entered a new phase in the Brexit saga, as Prime Minister Theresa May gave formal notice its intent to leave the EU last week. The negotiations over the breakup are supposed to be conducted over a two-year period, and are likely to be difficult. The EU has no intention of giving Britain a better deal than it had within the club, and wants the first item of business to be "exit bill" for Britain’s share of debts, pensions and other payments, which could run as high as EUR 60 billion. The British government will be under pressure to show the British public that it has reached a good deal, and has threatened to leave the EU without a deal if the EU is intransigent in the negotiations. That scenario, labeled "hard Brexit", would likely take a toll on the British economy and could send the pound downward. Negotiations are unlikely to commence for several months, but we’re likely to have plenty of tough talk between the parties in the meantime, which could create volatility for the struggling pound.
The US economy hasn’t missed a beat in 2017, and the markets are expecting strong data for the first quarter. The CB consumer confidence report soared to 125.6 in March, and strong consumer confidence levels should translate into increased consumer spending, a key component of economic growth. GDP for the fourth quarter was revised to 2.1%, up from 1.9% in the previous GDP report. With the economy headed in the right direction, the discussions around the monetary policy tables are not whether the Fed will raise rates, but will it press the rate trigger two or three more times in 2017. The markets will be paying close attention to the minutes of the March meeting, when the Fed raised rates by a quarter-point, to a range of 0.75-1.00%. Any hints about the timing of the next hike, as well as the tone of the minutes are factors which could move the currency markets on Wednesday. The markets considered the rate statement overly cautious, and this sentiment sent the US dollar broadly lower. If the reaction to the minutes is one of disappointment, the dollar could again head downwards.
