GBP/USD has posted slight losses in the Wednesday session. In North American trade, the pair is trading at 1.2880. On the release front, British employment numbers weakened. Average Earnings Index softened to 1.8%, matching the forecast. Claimant Count Change came in at 6.0 thousand, lower than the estimate of 10.5 thousand. In the US, Janet Yellen testifies before the House Financial Services Committee. On Thursday, the US releases PPI and unemployment claims. As well, Janet Yellen will testify before the Senate Banking Committee.
Is Brexit taking a bite out of the British economy? Last week’s PMIs raised concerns, as the gauges of the services, manufacturing and construction sectors all pointed to weaker growth in June. Wednesday’s employment numbers were not all that bad, but nevertheless were not as strong as the previous reading. Wage growth dipped to 1.8% in May, compared to 2.1% a month earlier. This marked the first reading below the 2.0% level since February 2016. Unemployment rolls expanded by 6.0 thousand, better than the forecast of 10.5 thousand. Despite softer wage growth, inflation climbed to 2.9%, its highest level in almost 4 years. This has put pressure on the BoE to increase rates, with policymakers at odds over whether to raise rates before the end of the year.
A major consequence of Brexit will be the loss of financial jobs, which will relocate from London to the continent. Frankfurt is the expected destination for many companies which will be downsizing their presence in London, but France is eager for a piece of the pie as well. The new French government wants to project a "finance-friendly" image, and on Tuesday, Prime Minister Edouard Philippe told a banking conference in Paris that he wants the city to become Europe’s main financial hub after Brexit. Philippe’s comments underscore that France is looking for a bigger role on the international stage, and Brexit is a unique economic and political opportunity for Philippe and President Emmanuel Macron.
All eyes are on Janet Yellen, who testifies before a congressional committee on Wednesday. Yellen’s prepared remarks were released ahead of her testimony, and there were no surprises. Yellen said that the Fed is on track to raise rates and begin reducing its balance sheet before the end of the year. The markets are skeptical about another rate hike, despite the Fed optimism. This is largely due to weak inflation numbers. Although the labor market remains close to capacity, this has not translated into stronger wage growth, a key driver of inflation. The CME Group has pegged a December rate increase at just 47%, while other forecasts are pointing to odds as low as 40%. Unless growth and inflation numbers move higher, the markets are likely to remain lukewarm about the likelihood of a third rate hike in 2017.
