GBP/USD has recorded small losses in the Wednesday session. In North American trade, the pair is trading at 1.2920. On the release front, British Services PMI posted a reading of 53.4, shy of the forecast of 53.6. Later in the day, the Federal Reserve releases the minutes of its June policy meeting. On Thursday, the US releases three key indicators – ADP Nonfarm Payrolls, unemployment claims, and the ISM Non-Manufacturing PMI.
This week’s British PMI reports are raising concerns, as all three PMIs pointed to slower growth in June. The PMIs gauge the strength in the manufacturing, construction and services sectors, and all three reports pointed to expansion, but at a weaker pace than in May. The double whammy of the British election and the start of Brexit talks with Europe have increased uncertainty and resulted in a decrease in new orders across the economy, has underscored by the softer PMI readings. Weaker economic conditions will compound the difficult situation of the BoE with regard to interest rate policy – the economy may not be ready for a rate hike, but inflation, which is running at a 3% clip, is also hurting the economy and is above the BoE’s target of 2%. BoE policymakers have not hesitated to air their differences in public, with BoE Governor Mark Carney at odds with MPC member Ande Haldane at others regarding raising rates. Just a few weeks ago, Carney appeared adamantly opposed to raising rates, but he has since softened his approach, and this triggered a strong pound rally last week, as the currency briefly punched above the 1.30 level.
The Federal Reserve will be back in the spotlight on Wednesday, with the release of the minutes from the June meeting. Federal Reserve policymakers have consistently projected one final rate hike in 2017, but the markets remain skeptical. The odds of a December rate hike are pegged at only 50%, while the likelihood of an increase in September is just 18%. The US economy slowed down in the first quarter, and there are signs that Q2 will also be soft. Consumer spending, which comprises two-thirds of US economic growth, remains soft. Another sore point in the economy is inflation, which remains below the Fed’s target of 2%. In June, Fed Chair Janet Yellen shrugged off inflation worries, saying that she expected inflation to remain soft due to temporary factors. The dollar was broadly higher after the June rate statement, as Fed policymakers were surprisingly upbeat about the economy and dismissed concerns about low inflation levels. Traders should keep a close eye on the minutes, which could be a market-mover. Will the Fed minutes present a positive view of the US economy? If yes, the dollar could respond with gains.
