GBP/USD has posted slight losses in the Thursday session. In North American trade, the pair is trading at 1.2990, down 0.25% on the day. In economic news, British Retail Sales posted a gain of 0.6%, above the forecast of 0.4%. US numbers were mixed. Unemployment claims dropped to 233 thousand, marking a 9-week low. On a sour note, the Philly Fed Manufacturing Index slowed down to 19.5, its weakest reading since November 2016. On Friday, the UK releases Public Sector Net Borrowing.
There was relief in the markets as British retail sales rebounded in June. After two sharp declines in the past three months, the key indicator rebounded with a respectable gain of 0.6%. Warm weather was a key factor in the gain, as a warm June translated into stronger clothing sales. Despite the solid June release, British consumers have plenty to worry about. The reality of Brexit has arrived, as British and EU teams have sat down to negotiate a divorce which promises to be extremely complex. Inflation is at higher clip than wage growth, meaning the consumer has less purchasing power. Finally, the weak pound (a key factor behind high inflation) has meant that imports have become more expensive.
British CPI has been picking up speed in recent months, but the indicator slowed to 2.6% in June, down from 2.9% in May. This was considerably lower than the estimate of 2.9% and the first time in 2017 that inflation levels have not increased from the previous reading. The soft data eases the pressure on the BoE to raise rates in order to curb high inflation levels. Policymakers at the BoE have been at odds over raising rates – even though inflation is high, the economy has been showing signs of weakness, raising concerns that the economy does not need higher interest rates. On Tuesday, BoE Governor Mark Carney said that the main factor behind high inflation was the fall in the pound, which has dropped sharply since the Brexit vote in June 2016. The BoE hold its next policy meeting on August 4, and analysts expect the policymakers to hold the benchmark rate at 0.25%, where it has been pegged since August 2016.
Brexit negotiators from Britain and the European Union met in Brussels earlier this week, marking the start of substantive negotiations on Britain’s exit from the EU. After weeks of "discussions 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’ for 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.
