HomeContributorsFundamental AnalysisPound Steady as BoE Stays on the Sidelines

Pound Steady as BoE Stays on the Sidelines

The British pound is showing little movement in the Thursday session. In North American trade, GBP/USD is trading at 1.3429, up 0.10% on the day. On the release front, Retail Sales jumped 1.1%, crushing the estimate of 0.4%. As expected, the Bank of England maintained the benchmark rate at 0.50%. In the US, consumer spending climbed, as Core Retail Sales and Retail Sales improved in November, with readings of 1.0% and 0.8%, respectively. Both indicators beat expectations. There was positive news on the employment front, as unemployment claims fell to 225 thousand, well below the forecast of 237 thousand. On Friday, the US releases the Empire State Manufacturing Index.

Earlier on Thursday, the Bank of England maintained interest rates at 0.50%. Although this was not a surprise, the vote was significant in that there were no dissenters, as all 9 policymakers were in agreement for the first time since February. BoE Governor Mark Carney will certainly be pleased with the unanimous vote, but could be on the hot seat as inflation continues to creep higher. CPI climbed to 3.1% in November, edging above the forecast of 3.0%. Inflation is now running at its highest level since March 2012, and Carney will have to write an open letter to open letter to the British finance minister, explaining how the BoE plans to lower inflation closer to the Bank’s target of 2.0%. Carney would rather not raise rates in the next few months, but that could be the most effective tool in bringing down inflation, which is at uncomfortably high levels.

There were no surprises from the Federal Reserve, which raised rates on Wednesday, bringing the benchmark rate to a range between 1.25% and 1.50%. This marked the third rate hike in 2017, testimony to the strong performance of the US economy. The Fed statement was optimistic about the economy, noting that the labor market "remained strong". It also lowered its unemployment forecast in 2018 from 4.1% to 3.9%, and revised growth for 2018 from 2.1% to 2.5%. Despite this rosy prognosis, the dollar was broadly down after the announcement. Why? One reason is the sore point in the economy – inflation. The Fed has not changed its September forecast for rate hikes next year, with the Fed dot plot indicating that three rate hikes are projected for 2018. This disappointed some investors who would like to see four increases next year. As well, the rate statement said that the Fed did not expect the tax reform legislation to have any long-term effect on the economy, contradicting White House claims that the legislation would trigger substantial growth in the economy.

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