GBP/USD is unchanged on Thursday, after losing ground for three successive days. In the North American session, the pair is trading at 1.3008, unchanged on the day. On the release front, there are no British indicators. In the U.S., producer price index reports softened in April. PPI dropped to 0.2%, down from 0.6%. This matched the forecast. Core PPI dropped from 0.3% to 0.1%, shy of the estimate of 0.2%. Unemployment claims ticked lower to 228 thousand, higher than the estimate of 215 thousand. On Friday, the U.K. releases monthly and quarterly GDP reports, as well as Preliminary Business Investment. In the U.S., the focus will be on consumer inflation indicators.
What can we expect from the Federal Reserve, which has kept a low profile? At last week’s policy meeting, the Fed maintained its key interest rate and indicated that it was comfortable with current monetary policy and had no plans to raise or lower rates in the coming months. However, the U.S. economy has exceeded expectations, with a sparkling GDP of 3.2% in Q1, and a sharp nonfarm payrolls of 263 thousand. Will these sharp numbers make a rate hike more likely? The markets don’t think so. According to the CME Group, there is zero probability that the Fed will raise rates before 2020. Moreover there is a 60% likelihood that the Fed will cut rates before the end of 2019. This sentiment could weigh on the greenback, as rate hikes make the currency more attractive to investors.
The Bank of England has sent out a message of a bias towards tightening rates, but is anybody listening? Last week BoE Governor Mark Carney that current markets expectations of future rate hikes were too modest. This hawkish stance failed to catch the attention of investors and the pound didn’t jump at the BoE’s command. Instead, GDP/USD has declined 1.25% so far this week and is testing the symbolic 1.30 level. The BoE has raised its forecast for U.K growth to 1.5%, up from the previous forecast of 1.2% and inflation is hovering close to the BoE’s target of 2.0%. With these healthy numbers, investors are not expecting rate hikes anytime soon, especially with the lingering uncertainty over Brexit.
