The British pound is almost unchanged in Wednesday trade. In the North American session, the pair is trading at 1.2995, down 0.18% on the day. On the release front, its has been a busy day on both sides of the pond. in the UK, Manufacturing Production improved to 0.0%, matching the forecast. The UK trade deficit jumped to GBP 12.7 billion, higher than the deficit of GBP 11.0 billion. Over in the US, inflation indicators disappointed, as PPI and Core PPI both declined 0.1%, missing their estimates of +0.1%. Unemployment claims rose to 244 thousand, higher than the estimate of 240 thousand. Inflation numbers will again be in focus on Friday, as the US releases CPI and Core CPI.
The British manufacturing sector is in trouble, based on a key indicator, Manufacturing Production. The indicator has managed just one gain in 2017, and the June reading of 0.00% is hardly good news. There was no relief from Britain’s trade balance, as the deficit climbed to GBP 12.7 billion in June, marking a three month high. Investors remain concerned about Brexit, and the Bank of England has not shied away from warning that Britain’s departure from the EU will hurt the British economy. One of the buzz words surrounding Brexit is "transition period", as some politicians have come out in favor of a period between Britain’s departure and post-Brexit rules coming into effect. This would minimize the destabilizing effect of Brexit on financial companies, for example. On Wednesday, BoE Deputy Governor and PRA Chief Executive Sam Woods said that "some form of implementation period is desirable", although he stopped short of providing any specifics. The concept of a transition period could come up in talks between the two sides if the May government decides that it wants a transition period.
The markets are looking for some clarity from the Federal Reserve, which is showing signs of backtracking on another rate hike in 2017. Earlier this year, the Fed strongly hinted that it planned to raise rates three times in this year, but so far only pressed the rate trigger twice, in March and June. After the June hike, Fed Chair Janet Yellen shrugged off concerns over low inflation, saying that it was due to "transient" factors. However, inflation has not improved and the Fed has changed its tune. Last week, St. Louis Federal Reserve President James Bullard said he opposed further Fed hikes, warning that another hike would actually delay inflation from hitting the Fed’s target of 2%. The Fed appears uncertain about when to raise rates, and predictably, this hesitancy is making investors skeptical that the Fed will act. There is little chance that the Fed will make any moves at the September and November meetings, and the odds of a rate hike in December are currently at 42%. Analysts are hoping for some insight into the Fed’s thinking when the Fed Reserve Dallas President Robert Kaplan and Minneapolis President Neel Kashkari deliver speeches on Friday.
