GBP/USD has posted gains in Friday’s North American session. Currently, GBP/USD is trading at the 1.30 level. In economic news, there are no British events on the schedule. In the US, it was a disappointing day as CPI and retail sales missed their estimates. Later in the day, the US releases UoM Consumer Sentiment, which is expected to improve to 95.1 points.
In the US, consumer spending and inflation numbers disappointed in June, sending the US dollar broadly lower. With the US economy showing signs of a slowdown and inflation levels at low levels, the markets were hoping for some strong numbers. However, the data was softer than expected. CPI posted a flat reading of 0.0%, shy of the forecast of 0.1%. There was no relief from retail sales, which declined 0.2%, compared to an estimate of +0.2%. Retail sales have now declined for a second straight month, renewing concerns that second quarter growth could be soft, which would be bad news for the US dollar.
The spotlight was on Janet Yellen this week, as she testified before congressional and senate committees about the Federal Reserve’s monetary policy report, which was released last week. Yellen’s comments didn’t contain anything unexpected, and the markets treated her appearances before lawmakers as a non-event. Yellen reiterated that the Fed planned to raise rates "gradually", and added that the Fed would begin trimming its balance sheet before the end of the year. The Fed chair didn’t provide any timelines, but the most likely timelines are September for a balance sheet reduction, with a rate hike to follow in December. However, despite Yellen’s assurances, the markets remain lukewarm about a rate hike before the end of the year. Investors are concerned that the US economy has slowed down in 2017 and may not need another rate hike. In her testimony before a congressional committee, Yellen repeated that she believes the factors weighing on inflation are temporary. However, she acknowledged that with inflation well below the Fed’s target of 2%, "there could be more going on there". Early in the year, the Fed all but signed on the dotted line that it would raise rates three times in 2017, but a third rate hike has become a serious question mark, with the odds of a December hike continuing to dip. According to the CME Group, the current odds for a December increase are just 43%.
The British economy has been churning out some weak data, raising fears that the "Brexit bite" may be taking a toll on the economy. Last week’s PMIs, which are important gauges of activity in the construction, manufacturing and services sectors, all softened in June, pointing to weaker expansion than a month earlier. Wage growth continues to slow, and dipped to 1.8% in May, marking the first time it has fallen below the 2.0% level since February 2016. The reading is also worrisome as it shows that inflation has overtaken wage growth, meaning that real wages for the British worker are falling. The BoE is divided on whether to raise rates before the end of the year, and policymakers are in an unenviable position regarding a rate hike – the economy may not need another rate hike, but inflation is running at 3%, well above the BoE’s target. A weak British currency has contributed to high inflation, while at the same reducing the purchasing power of the British consumer.
