The British pound is showing losses for a third straight day. In Wednesday’s North American session, GBP/USD is trading at 1.3174, down 0.11% on the day. On the release front, British employment numbers were mixed. Wage growth improved to 2.2%, above the forecast of 2.1%. However, unemployment claims increased by 1.7 thousand, above the estimate of 1.3 thousand. The unemployment rate remained pegged at 4.3 percent. In the US, the focus was on housing data, and the September numbers were soft. Building Permits slowed to 1.22 million, shy of the estimate of 1.25 million. Housing Starts dropped to 1.13 million, missing the forecast of 1.18 million. On Thursday, the UK releases retail sales, and the US will publish unemployment claims and the Philly Fed Manufacturing Index.
The British labor market remains tight, as underscored by an unemployment rate of just 4.3%, the lowest since 1975. However, much like the situation in the US, a strong employment picture has failed to translate into strong wage growth. This is even more perplexing in the case of the UK, where inflation is running at clip of 3 percent. When inflation is taken into account, wages actually declined 0.4% compared to a year ago. The lack of wage growth has squeezed consumers, and has complicated the Bank of England’s plans to raise interest rates.
British inflation continues to accelerate, as CPI, the primary gauge of consumer spending, showed that inflation in September was 3.0% higher than a year ago. This marked the fastest rise in inflation since April 2012. The continuing rise in inflation is primarily due to the weak British pound, which has dropped 12 percent since the Brexit vote in June 2016. The CPI release likely means that the Bank of England remains on track to raise interest rates at its November policy meeting. Inflation was on the mind of lawmakers on Tuesday, who grilled BoE Governor Mark Carney when he testified before a parliamentary committee. Carney said that he expected inflation would peak in October or November, and that the bank had refrained from acting earlier to raise rates in order to lower inflation, saying that high inflation was a "trade-off" in order to protect economic growth.
Are the Brexit talks dead in the water? The two sides have little progress to show after several rounds of negotiations. Prime Minister Theresa May is keen to talk trade with the Europeans, but the latter have conditioned trade talks on progress being reached on a number of issues, such as Britain’s payment when it leaves the European Union, the status of the border with Northern Ireland and the jurisdiction of the European Court of Justice on European citizens living in the UK. The two sides remain far apart on all of these issues, and each party has criticized the other for lack of flexibility. The EU holds a summit on Thursday, and could announce that they won’t talk trade with Britain until 2018. The lack of progress means that the possibility of a ‘hard Brexit’, in which Britain would leave with no deal being reached, is growing. BoE Governor Mark Carney acknowledged on Tuesday that the Bank has made contingency plans in case there is no agreement. However, British businesses are lobbying hard for an agreement, and want a 2-year interim period, such as a temporary customs union with the EU, in order to soften the blow of leaving the EU.
