The British pound has posted slight gains in the Wednesday session. GBP/USD is up 0.43%, as it trades at the 1.28 line. On the release front, it’s been a busy day. In the UK, wage growth dropped to 2.1%, short of the estimate of 2.4%. Unemployment rolls dropped 7.3 thousand, missing the forecast of 12.5 thousand. In the US, consumer data was soft, as retail sales and CPI posted declines of 0.3% and 0.1%, respectively. Later in the day, the Federal Reserve announces its benchmark rate, which is expected to increase by 25 basis points to 1.25 percent. On Thursday, the UK releases retail sales, and the BoE will make a rate announcement, with the rates expected to remain at 0.25%. In the US, the major release is unemployment claims, with an estimate of 241 thousand.
After a bruising election which saw the Conservatives squander a comfortable majority, a chastened Prime Minister May met with French President Emmanuel Macron on Wednesday. The two leaders are moving in opposite directions; one leader is heading for a massive majority, while the other is clinging onto power by her fingernails and may be forced out of office in the near future. Macron, who is expected to support a hard line against Brexit, stated that the EU would leave the "door open" in case Britain changed its mind. That, however, is a far-fetched scenario. As for May, she continues to exude an air of "business as usual", and insisted that the Brexit talks would commence as planned on June 19. Will the talks start on time? There are reports that European officials will ask for a delay, given the political turmoil in Britain. On Tuesday, Denmark’s Finance Minister, Kristian Jensen, said that he hoped that the inconclusive UK vote would lead to a "time out", so that the UK can rethink its approach to Brexit. The Europeans, stung by Brexit, are not feeling much sorrow for May’s troubles, and she will have to soften her approach her previously hard-nosed approach to Brexit. If the new government expresses a willingness to negotiate a "soft Brexit", which keeps the UK in the single market, this would be a positive development for British businesses, and could boost the pound, which has taken a beating since the Brexit vote last June.
The Federal Reserve be on center stage on Wednesday, when it announces the new benchmark rate. The Fed is widely expected to raise interest rates by a quarter point to 1.25%, so the markets will be focusing on the language of the rate statement and economic projections. What is less clear, however, is what the Fed has planned in the second half of 2017. Analysts are predicting that the Fed will deliver a "dovish hike", meaning that together with the rate increase, the Fed rate statement will be cautious in tone, and dovish regarding additional rate hikes. Earlier in the year, three rate hikes in 2017 seemed almost a given, but currently, the odds of a September move are just 28%. There are two key items which could affect European stock markets. First, the Fed Economic Projections will detail forecasts of inflation, growth and unemployment, and most importantly, the rate hike path. With the US economy performing better in the second quarter, there’s a strong likelihood that the Fed will not moderate its rate hike projections,which is good news for the dollar. Secondly, the markets will be looking for details regarding its plan to lower the $4.2 trillion balance sheet. If the Fed outlines a plan to reduce its holding in H2, the dollar could respond positively. Another variable is the political paralysis which has engulfed Washington. With the Trump administration spending most of its energy on damage control, little progress is being made with regard to Trump’s agenda of tax reform and major spending on infrastructure. The markets are becoming more skeptical about Trump’s ability to work with Congress, and if this sentiment is shared by the Fed, it is likely to sound dovish regarding rate hikes in September or December.
