GBP/USD climbed close to the symbolic 1.30 level on Thursday, but has retracted. In North American trade, the pair is trading at 1.2940. On the release front, US employment numbers were softer than expected. ADP Nonfarm Payrolls plunged to 154 thousand, well below the estimate of 184 thousand. Unemployment claims rose to 248 thousand, above the estimate of 243 thousand. On Friday, there are three key employment events – Average Hourly Earnings, Non-Farm Employment Change and the unemployment rate. As well, the Federal Reserve will release its semi-annual Monetary Policy Report.
British PMIs in June continued to point to expansion, but there are concerns, as all three PMIs pointed to slower growth in June. The PMIs, which gauge the strength in the manufacturing, construction and services sectors, were all down compared to the May readings. 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, as underscored by the softer PMI readings. Weaker economic conditions and fears of a bite from Brexit have put the BoE in a difficult position regarding interest rate policy – the economy may not be ready for a rate hike, but inflation is at 3%, well above the BoE’s inflation target of 2%. A rate hike would likely push inflation to lower levels.
BoE policymakers have not hesitated to publicly air their differences over rate policy, which clearly will not add to investor confidence. BoE Governor Mark Carney is at odds with MPC member Ande Haldane and other members regarding raising rates. Just a few weeks ago, Carney went on record, adamantly opposed to a rate hike. However, he has since softened his approach, and his comments at the ECB forum last week triggered a strong pound rally, as the currency punched above the 1.30 level for the first time since late May.
The Federal Reserve minutes were released on Wednesday, but the markets reacted with little more than a shrug. The minutes revealed divisions in the Fed over inflation and the bloated balance sheet, but failed to provide any clarity about future monetary policy. Some FOMC members expressed unease at the Fed’s current forecast of rate hikes, given the persistently low levels of inflation. According to the current "dot plot", the Fed expects to raise rates in December, and three times in 2018. There was also dissension over the timing of reducing the $4.2 trillion balance sheet – some policymakers were in favor of starting in September, while others preferred later in the year. At the June meeting, the Fed stated that it would begin reducing the balance sheet this year, but provided no details. Analysts expect the Fed to start winding down the balance sheet in September, prior to a rate hike in December. The markets are lukewarm about a rate hike in December, with the odds at just 50%, according to the CME Group.
