The British pound has ticked lower in the Tuesday session. In North American trade, GBP/USD is trading at 1.3324, down 0.12% on the day. On the release front, British CPI came in at 3.1%, edging above the estimate of 3.0%. In the US, PPI posted a gain of 0.4%, matching the estimate. Core PPI came in at 0.3%, above the estimate of 0.2%. On Wednesday, the Federal Reserve is expected to raise rates to a range between 1.25% to 1.50%. As well, the US releases CPI reports.
Brexit negotiations are back on track, and the European Union is expected to give a green light to the talks shifting to trade issues. For months, the talks have been stuck over three issues: 1) the size of Britain’s divorce bill; 2) the role of the European Court of Justice; and 3) Northern Ireland’s borders with the UK and Ireland. After some feverish negotiations, sufficient progress has been made on these issues to satisfy the EU, which holds a key summit next week. What will a new trade relationship look like? Brexit policymakers appear divided on this question. On Sunday, Brexit minister David Davis said he envisions a comprehensive trade deal with Europe, which would be signed just after Britain leaves the bloc. The EU recently signed a free-trade treaty with Canada, and Davis said that he wants an agreement "Canada plus plus plus", meaning that the deep trading ties between the sides and access to European markets would remain intact. International Trade Secretary Liam Fox went a step further on Tuesday, saying that he wants a post-Brexit trading relationship with the EU that is "virtually identical" to the current relationship. It’s questionable whether the EU would agree with Fox’s comments, as Brussels doesn’t want to give Britain too sweet a deal which could give other EU members any ideas about departing from the bloc.
All eyes are on the Federal Reserve, which meets on Wednesday for a policy meeting. The markets are expecting a quarter-point rate hike. Another rate hike is expected in January, with fed futures pricing a rate hike at 87%. The Fed has hinted that it could raise rates up to three times in 2018, and this upward movement in rates will likely propel the US dollar upwards. The US labor market remains at full capacity and various sectors in the economy are reporting a lack of workers. Still, this has not translated into stronger wage growth, despite predictions from Janet Yellen and other Fed policymakers that a lack of workers is bound to push up wages.
