GBP/USD has paused after posting strong losses on Friday. In the North American session, GBP/USD is trading at 1.3060. In economic news, there are no major events on the schedule. British Rightmove HPI rebounded in July, posting a small gain of 0.1%. Last month, the indicator declined 0.4%. In the US, the Empire State Manufacturing Index softened to 9.8 points, much weaker than the forecast of 15.2 points. On Tuesday, the UK releases a host of inflation indicators, led by CPI, which is expected to remain steady at 2.9%.
The first full round of Brexit talks began on Monday in Brussels, as Britain and European Union members square off to begin substantive negotiations on Britain’s exit from the EU. After weeks of "discussion about what to discuss", the UK agreed to the European demand that the negotiations would focus on the rights of EU citizens in the UK and Britain’s bill for leaving the EU, before entering talks on a new trade agreement. Britain has presented its position on guaranteed rights for EU citizens living in the UK, but EU negotiators have said that this offer doesn’t go far enough. The EU has handed Britain an exit bill of EUR 69 billion, and although the May government has agreed that it owes funds to Brussels, it certainly will counter with a much lower figure. With significant gaps between the parties on both of these issues, the negotiations promise to be difficult. Another complication is internal dissent within the May government, with senior officials at odds over a ‘transition period’ Britain after leaving Brexit. Finance Minister Philip Hammond has suggested a transition period of two years, but Brexit Secretary David Davis has said he wants the UK completely out of the single market when Brexit negotiations terminate in March 2019.
The US labor remains close to capacity and the unemployment rate is sparkling, at just 4.4%. So why is inflation mired at low levels? Economists are puzzled, and the Federal Reserve is also at a loss, although Fed Chair Janet Yellen insists that it’s only a matter of time before inflation moves higher. In testimony before a Senate committee last week, Yellen insisted that it was "premature to conclude that the underlying inflation trend is falling well short of 2 percent", and that with a strong labor market "the conditions are in place for inflation to move up". However, the markets remain skeptical that the Fed will make a move before the end of the year, with the odds of a December hike at just 43%, according to the CME Group.
In the US, consumer inflation and spending numbers for June were sluggish. CPI edged up to 0.0%, short of the forecast of 0.1%. Retail Sales declined 0.2%, missing the estimate of 0.1%. This marked the third decline in the past four months. Consumer spending accounts for 2/3 of US economic activity, so it’s no surprise that weak spending has also meant weak inflation, despite Yellen’s claim that low inflation is a temporary phenomenon. The US economy had a weak first quarter, with growth of just 1.4%. If the second quarter follows suit, investors could sour on the US dollar, and the pound could take advantage and move higher.
