The British pound has halted this week’s slide in the Tuesday session. GBP/USD is up 0.65%, as it trades at 1.2740. On the release front, British CPI gained 2.9%, beating the forecast of 2.7%. This was the strongest gain in CPI since June 2013. In the US, inflation levels were far less impressive, as PPI dropped to 0.0%, matching the forecast. Wednesday promises to be busy. The UK will release wage growth and unemployment claims. Over in the US, we’ll get a look at key retail sales and CPI reports. As well, the Federal Reserve is expected to raise interest rates by a quarter-point, to 1.00 percent. With such a large number of major events, traders should be prepared for volatility from GBP/USD on Wednesday.
It has been a week to forget for Prime Minister Theresa May, as the aftershocks of her stunning election debacle continue to rock the country. One of May’s critics called her a "dead woman walking", but she seems determined to plod ahead and continue to lead the country. The Conservatives find themselves short of a majority in parliament, and have pinned their hopes of remaining in power on reaching an agreement with the DUP, a small conservative Irish party. However, no deal has been reached as of yet, and the continuing political vacuum could weigh on the pound, which has dropped sharply since the election. Meanwhile, the Brexit negotiations are scheduled to commence on June 19, but there are signs that Europeans will ask for a delay in the start of talks, given the precarious political situation 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 are delighted by May’s troubles, as 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.
All eyes are on the Federal Reserve, which wraps up its policy meeting on Wednesday. The markets have priced in a quarter-point hike, at close to 100%, so it would be a major shock if the Fed doesn’t make a move. What’s in store after that? An additional rate hike seems much less likely in the third quarter, with the CME forecasting the odds of a September move at just 28%. The markets are skeptical about another rate hike unless the political situation in Washington shows signs of stabilizing. The Trump administration remains in damage control mode, as it’s difficult to assess the damage from the dramatic evidence of ex-FBI director James Comey. The Trump administration continues to lurch from one crisis to another, and President Trump seems disconnected not just from the Democrats, but from many Republican lawmakers as well. The Fed and the markets have serious concerns with regard to Trump’s ability to move forward with his economic agenda, and this sentiment could weigh on the US dollar.
