Fundamental Analysis

Pound Slips as UK Wage Growth Misses Forecast

Typography

The British pound has posted losses in the Wednesday session. In North American trade, GBP/USD is trading at 1.3208, down 0.56% on the day. On the release front, British employment numbers were mixed. Average Earnings Index remained steady at 2.1%, shy of the forecast of 2.3%. There was better news from unemployment claims, which declined 2.8 thousand, more than the estimate of a 0.8 thousand decline. As well, the unemployment rate edged lower to 4.3%, below the forecast of 4.4%. In the US, inflation numbers improved in August, but fell short of the estimates. PPI improved to 0.2%, shy of the estimate of 0.3%. As well, Core CPI gained 0.1%, short of the forecast of 0.2%. Traders should be prepared for a busy Thursday. The BoE will release the benchmark interest rate, while the US will publish CPI and unemployment claims.

It has been a busy week for the British pound. On Tuesday, the pair jumped to 1.3288, its highest level since September 2016. The pound was buoyed by strong inflation data, as CPI improved to 2.9% in August, up from 2.6% a month earlier. CPI, the primary gauge of consumer inflation, jumped on higher clothing and fuel prices. With inflation remaining above the BoE's target of 2.0%, policymakers will be under renewed pressure to raise interest rates. However, the economy has lost steam in 2017, and rate hike could hurt the economy. How will this play out at the BoE? Policymakers won't have much time to mull over the latest inflation readings, as the BoE holds its monthly policy meeting on Thursday. Whether the bank opts to raise rates or stay on the sidelines, traders should be prepared for some movement from the pound.

Bexit negotiations are grinding slowly, with plenty of major gaps between Britain and the European Union. Britain must take legislative measures to untangle itself from the continent, and the May government took a first step in that direction on Monday, as parliament voted on the EU Withdrawal Bill. The bill, which will convert all existing EU legislation into UK law, passed its second stage, with the government winning the vote by 326-290. However, the bill is far from done, with many MPs, including Conservatives, tabling amendments. For Prime Minister May, still smarting from a disastrous June election, the vote is a small victory on the long journey of navigating Britain out of Brexit.

Despite a strong economy, US inflation levels remain stubbornly weak, well below the Federal Reserve's inflation target of 2.0%. This was underscored on Wednesday, as PPI and Core PPI missed their estimates in August, although both releases did rebound compared to the July readings. The US labor market remains very strong, but wage pressure has been limited, despite the fact that many businesses cannot fill job openings. Weak inflation has hampered the Fed's plans to raise interest rates a third time this year, and the odds of a December rate hike are currently pegged at 41%, as the markets are increasingly doubtful that the Fed will make a move before next year. If the August CPI numbers beat expectations, the likelihood of a December hike should move closer to 50%.

Author: MarketPulseWebsite: http://www.marketpulse.com/
MarketPulse
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