The pound languished near a four-month low yesterday as the dollar rallied and traders sold sterling the day before a Bank of England meeting where interest rates are expected to be kept on hold. UK economic data has taken a turn for the worse in recent weeks, causing traders to almost completely discount the possibility of an interest rate hike today. In addition, worries about conflict within the British government over what its relationship with the European Union should look like after Brexit have hurt sterling.
The market will scrutinise Thursday’s decision for any indication of whether a rate hike is still likely this year. A narrow vote split among the nine-member Monetary Policy Committee, led by Governor Mark Carney, could prepare markets for a hike in August. Analysts said the BoE could find it challenging to explain its future approach to a market that has within a month cut its expectation of a May hike from 90 to around 10 percent.
Tensions within Britain’s governing Conservative Party over how to agree terms of exit from the European Union have also re-emerged as a political risk for the pound. Foreign Secretary Boris Johnson described as “crazy” a proposed customs partnership that is believed to be Prime Minister Theresa May’s preferred option for relations with the EU after Britain leaves the bloc.
U.S. producer prices were relatively flat in April after strong gains in the first quarter, held down by a moderation in the cost of both goods and services, which could ease fears that inflation pressures were rapidly building up. The slowdown in wholesale price growth reported by the Labor Department yesterday is likely to be temporary, as manufacturers have been reporting paying more for raw materials.
The Labor Department said its producer price index for final demand edged up 0.1 percent last month after increasing 0.3 percent in March. That lowered the year-on-year increase in the PPI to 2.6 percent from 3.0 percent in March. A key gauge of underlying producer price pressures that excludes food, energy and trade services also nudged up 0.1 percent last month. The so-called core PPI had increased by 0.4 percent in each of the past three months. In the 12 months through April, the core PPI rose 2.5 percent after jumping 2.9 percent in March. Core goods prices increased 0.3 percent in April, matching March’s gain.
Economists also expect oil prices to surge after President Donald Trump on Tuesday pulled the United States out of an international nuclear deal with Iran.
12.00 – GBP: BOE Inflation Report
12.00 – GBP: MPC Official Bank Rate Vote expected to be 7-2
12.00 – GBP: Monetary Policy Summary
12.00 – GBP: Official Bank Rate expected to be unchanged at 0.5%