The British pound continues to have an uneventful week. In Wednesday’s North American trade, GBP/USD is trading at 1.3378, up 0.04% on the day. On the release front, British CPI remained pegged at 2.4% for a second straight month and matched the forecast. Another key inflation indicator, PPI Input, jumped 2.8%, crushing the estimate of 1.7%. In the US, inflation reports were positive. The Producer Price Index jumped to 0.5%, well above the estimate of 0.1%. This marked the highest gain since April 2017. Core PPI edged up to 0.3%, above the forecast of 0.2% percent. Later in the day, the Federal Reserve is expected to raise rates by a quarter-point and will release a rate statement. On Thursday, we’ll get a look at retail sales in the U.K and the U.S. As well, the U.S releases unemployment claims.
All eyes are on the Federal Reserve, which winds up its 2-day policy meeting on Wednesday. The Fed is widely expected to raise rates to a range between 1.75% and 2.0%. The odds of a quarter-point move stand at 96% percent, according to the CME Group. Although a rate hike has been priced in by the markets, such a significant move could boost the US dollar against its rivals. Investors will be paying close attention to the language of the rate statement as well as the “dot-plot” forecasts, looking for any clues regarding rate hikes in the second half of 2018. The Fed is currently projecting a total of three hikes this year, but a strong economy and rising inflation have raised speculation that the Fed could raise rates four times in 2018.
Wage growth in the U.K continues to lag behind inflation, which is hampering consumer spending. The labor market remains tight, but surprisingly, this has not translated into stronger wages for British workers. Where does this leave the Bank of England? Policymakers will remain hesitant to raise interest rates, unless inflation reverses its downward trend and key economic indicators move higher. The BoE will convene on June 21 for a policy meeting, and the bank is expected to hold the benchmark rate at 0.50 percent.
