GBP/USD has posted considerable gains on Tuesday, as the pair trades slightly below the 1.25 line in North American trade. On the release front, British CPI jumped to 2.3%, above the estimate of 2.1%. British Public Sector Net Borrowing posted a deficit of GBP 1.1 billion, much lower than the forecast of GBP 2.9 billion. In the US, Current Account posted a deficit of $112 billion, well below the estimate of $129 billion. FOMC member William Dudley spoke at an event in New York City, but did not discuss monetary policy.
Inflation in the UK continues to climb, led by CPI. The key consumer indicator rose 2.3% in February, beating the forecast of 2.1%. This is a significant reading, as it surpassed the BoE’s inflation target of 2.0% for the first time in three years. Just one year ago, British CPI was sputtering at 0.3%. The British pound has plummeted 17% since the Brexit vote in June, and a weak pound has led to higher inflation levels.
British Prime Minister Theresa May has been saying for months that she wanted to trigger Article 50, the mechanism for triggering Brexit, at the end of March. May has stuck to her deadline, as the government announced on Monday that it would formally launch Brexit talks on March 29. The announcement comes after the government passed its Brexit bill last week. Relations between the EU and Britain have soured since the Brexit vote in June, and negotiations promise to be arduous and possibly acrimonious between the parties. The pound has dipped lower on the Brexit announcement.
With the Fed’s quarter-rate point behind us, what’s next for Janet Yellen & Co.? The CME Group has priced a rate hike in May at just 6%, while a June move is priced at 54%. With a dearth of key fundamentals in the US this week, the markets are left to monitoring comments from FOMC members who will be speaking this week, including Fed Chair Janet Yellen on Thursday. On Monday, Chicago Fed President Charles Evans said he expects the Fed to raise rates two more times this year. This echoes the Fed’s projection in its rate statement. Although three rate hikes in 2017 would be no small feat, market players want four hikes, and have reacted with disappointment to the Fed’s more cautious approach. This has sent the US dollar lower, and the pound is up 2.4% since the Fed announcement last week.