Pound Dips Lower Despite Positive GDP Report, U.S. Durables Sink

 | Jul 27, 2016 09:06AM ET

The British pound has posted slight losses on Wednesday, as GBP/USD is trades slightly above the 1.31 line in the North American session. On the release front, British Preliminary GDP climbed 0.6%, beating the estimate.

In the US, the Federal Reserve will set the benchmark rate and issue a policy statement. US durable goods orders were dismal. Core Durable Goods Orders came in at -0.5%, short of the forecast of +0.3%. Durable Goods Orders plunged 4.0%, compared to an estimate of -1.1%. This figure marked the indicator’s worst decline in 2016. On Thursday, the US will release Unemployment Claims.

There was positive news out of the UK, as second quarter British Preliminary GDP beat expectations. The indicator climbed 0.6%, beating the forecast of 0.5%. This follows the Final GDP release for Q1, which came in at 0.5%. However, economists are expecting a weak third quarter, possibly even contraction, due to Brexit.

Monthly economic indicators are already pointing to a decline in economic growth since the referendum, such as recent PMI and retail sales numbers. In the wake of Brexit, the EU and Britain will have to hammer out and a new economic relationship and any developments with regard to the negotiations could clarify matters and lend some stability to the markets.

So far, however, the only certainty is that negotiations will not commence anytime soon, as the British government has said that it will not invoke the exit mechanism (Article 50 of the Treaty of Lisbon) before the end of 2016. Meanwhile, G-20 finance ministers met in China on the weekend. The group acknowledged that Brexit vote would add uncertainty to global economic conditions, but expressed confidence that this challenge would be met.

The Federal Reserve will take center stage on Wednesday. The Fed is not expected to raise the current benchmark rate of 0.25%, so the markets will be paying close attention to the policy statement, looking for clues about a possible hike later in the year. The markets have priced in a 51% chance of a rate hike before the end of the year, but that could quickly dip if the Fed sends a dovish message to the markets .

The previous policy statement preceded the Brexit vote by just a week, so it will be interesting to see what Fed policymakers have to say about the British decision to leave the European Union. Solid US numbers in the past few weeks has fueled speculation about a possible rate hike, although it’s extremely unlikely the Fed will make at the Wednesday meeting.

Although the US economy is in good shape, the fly in the ointment is inflation, which remains stuck at low levels, well short of the Fed’s target of around 2 percent. Fed policymakers will be hesitant to raise rates if inflation is not projected to point upwards.

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GBP/USD Fundamentals

Wednesday (July 27)

  • 4:30 British Preliminary GDP. Estimate 0.5%. Actual 0.6%
  • 4:30 British Index of Services. Estimate 0.3%. Actual 0.3%
  • 6:00 British CBI Realized Sales. Estimate +2 points. Actual -14 points
  • 8:30 US Core Durable Goods Orders. Estimate 0.3%. Actual -0.5%
  • 8:30 US Durable Goods Orders. Estimate -1.1%. Actual -4.0%
  • 10:00 US Pending Home Sales .Estimate 1.9%
  • 10:30 US Crude Oil Inventories. Estimate -2.1M
  • 14:00 US FOMC Statement
  • 14:00 US Federal Funds Rate. Estimate

Upcoming Key Events

Thursday (July 28)

  • 8:30 US Unemployment Claims. Estimate 261K

*All release times are EDT

GBP/USD for Wednesday, July 27, 2016