GBP/USD – Pound Subdued Ahead of Expected BoE Rate Hike

The British pound has posted slight losses in the Wednesday session. In North American trade, GBP/USD is trading at 1.3266, down 0.20% on the day. On the release front, British Manufacturing PMI improved to 56.3, above the estimate of 55.8 points. In the US, ADP Nonfarm Payrolls surged to 235 thousand, crushing the estimate of 202 thousand. On the manufacturing front, ISM Manufacturing PMI slowed to 58.7, missing the forecast of 59.5 points. Today’s highlight is the FOMC rate statement, with no change expected in the benchmark interest rate. On Thursday, the Bank of England is expected to raise interest rates to 0.50%. The UK releases Construction PMI and the US will publish unemployment claims.

Central banks are in focus this week, beginning with the Federal Reserve later on Wednesday. The Fed is widely expected to maintain the benchmark rate at 1.25%, but the rate statement could provide clues about future rate policy. The markets have priced in a December rate at 98.5%, which would mark a third rate for 2017. With a December rate hike a given, barring a meltdown in the US, what can we expect in 2018? That depends to a large degree on the new chair of the Fed. Janet Yellen will wind up her 3-year term in February, and she is not expected to be reappointed by President Trump. The front runner is Jerome Powell, who would likely follow Yellen’s current policy of gradual, incremental rates. Another candidate is economist James Taylor, who is a proponent of much higher rates – his “Taylor Rule”, which calls for higher rates when inflation is high or the labor market is at full capacity. Trump is expected to make his choice on Thursday, ahead of his trip to Asia.

The BoE will take center stage on Thursday, but unlike the Fed, the BoE is expected to raise rates at its policy meeting. A rate hike of 25 basis points would raise rates to 0.50%, and would mark the Bank’s first rate increase since 2007. Investors have stayed on the sidelines on Wednesday, and shrugged off a strong Manufacturing PMI, which could have been a catalyst for purchasing pounds. Bank policymakers are in a quandary with regard to rate policy. Inflation is running well above the Bank’s target of 2 percent, which has eroded consumer spending. As well, a labor market that is close to capacity is a reason in favor of raising rates. However, economic growth has slowed and there are fears that Brexit will take a toll on the British economy. The deadlock in the Brexit negotiations has done nothing to calm these concerns, as investors and the business community are becoming increasingly frustrated with the government’s lack of a coherent policy regarding Brexit. At the end of the day, a quarter-point rate hike should not have a huge effect on the economy, but the psychological significance of the move could boost the pound against the US dollar.

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GBP/USD Fundamentals

Wednesday (November 1)

• 3:00 British Nationwide HPI. Estimate 0.2%. Actual 0.2%
• 5:30 British Manufacturing PMI. Estimate 55.8. Actual 56.3
• 8:15 ADP Nonfarm Employment Change. Estimate 202K. Actual 235K
• 9:45 US Final Manufacturing PMI. Estimate 54.5. Actual 54.6
• 10:00 US ISM Manufacturing PMI. Estimate 59.5. Actual 58.7
• 10:00 US Construction Spending. Estimate -0.1%. Actual +0.3%
• 10:00 US ISM Manufacturing Prices. Estimate 68.0. Actual 68.5
• 10:30 US Crude Oil Inventories. Estimate -1.5M
• All Day – US Total Vehicle Sales. Estimate 17.5M
• 14:00 US FOMC Statement
• 14:00 US Federal Funds Rate. Estimate <1.25%

Thursday (November 2)

• 5:30 British Construction PMI. Estimate 48.3
• 8:00 BoE Inflation Report
• 8:00 MPC Official Bank Rate Votes. Estimate 6-0-3
• 8:00 BoE Monetary Policy Summary
• 8:00 BoE Official Bank Rate. Estimate 0.50%
• 8:00 MPC Asset Purchase Facility Votes. Estimate 0-0-9
• 8:30 BoE Governor Mark Carney Speaks
• 8:30 US Unemployment Claims. Estimate 235K

*All release times are GMT

*Key events are in bold

GBP/USD for Wednesday, November 1, 2017

GBP/USD November 1 at 12:00 EDT

Open: 1.3284 High: 1.3321 Low: 1.3251 Close: 1.3257

GBP/USD Technical

GBP/USD showed little movement in the Asian and European sessions. The pair has edged lower in North American trade

• 1.3224 is providing support
• 1.3347 is the next resistance line

Further levels in both directions:

• Below: 1.3224, 1.3122, 1.3022 and 1.2904
• Above: 1.3347, 1.3444 and 1.3514
• Current range: 1.3224 to 1.3347

OANDA’s Open Positions Ratio

GBP/USD ratio is showing slight gains towards short positions. Currently, long positions have a majority (53%), indicative of trader bias towards GBP/USD reversing directions and moving higher.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.