The British pound has moved upwards at the start of the week. In Monday’s North American session, GBP/USD is trading at 1.3384, up 0.25% on the day. On the release front, British Construction PMI remained unchanged at 52.5 in April, above the estimate of 52.0 points. There is just one event on the calendar, with US Factory Orders expected to decline of 0.4%, after a strong gain of 1.6% in the previous release. On Tuesday, the focus will be on the services sector. The U.K releases Services PMI and the U.S publishes ISM Non-Manufacturing PMI and JOLTS Jobs Openings.
A rate hike in June from the Federal Reserve is virtually a given, with the CME Group forecasting a gain of 94%. At the same time, there is increasing talk that the Fed is moving closer to a neutral monetary policy. Recent statements by FOMC policymakers appear to support such a conclusion, which would mean that the Fed would let the economy ‘ride on its own steam’ without intervening by adjusting interest rates. The minutes of the May meeting noted that policymakers would consider allowing inflation to rise above the Fed’s 2 percent target for a temporary period, which means that the Fed would not rush to raise rates based on the inflation target. After June, the Fed is most likely to raise rates in September. Analysts are divided on whether a fourth rate hike will be needed. If the economy is in danger of overheating, policymakers would have to seriously consider another rate increase in December.
The U.S published strong employment numbers on Friday, but the releases provided only a small boost for the US dollar. Wage growth improved to 0.3% in May, up from 0.1% a month earlier. Nonfarm payrolls jumped from 189 thousand to 164 thousand and the unemployment rate dropped to a sizzling 3.8 percent. All three indicators beat their estimates and are indicative of a labor market running at full capacity midway through the second quarter.
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With the European Union finding itself embroiled in an escalating trade war with the Trump administration, Brexit supporters are no doubt wishing that the U.K had its own trade agreement with the U.S. Although Britain has one foot out of the EU, any tariffs applied to the EU could cost British jobs.
On Thursday, the Trump administration made good on its threats and imposed stiff tariffs on the European Union, Mexico and Canada. The U.S had granted all three trading partners a temporary extension, but cited insufficient progress on trade talks as the reason for the tariffs. This has triggered promises of retaliatory tariffs on US products, and matters heated up on the weekend at the G-7 meeting of finance ministers in Canada. U.S Treasury Secretary Steve Mnuchin faced sharp criticism from other finance ministers over the tariffs. There are fears that the escalating trade tensions could trigger a global trade war.