Rocky week for the pound
The truce that had supported sterling since early September came to its inevitable end last week and the pound was the weakest among the major currencies, falling by an average of -2%. Its smallest loss was the two cents it gave up to the Canadian dollar: its largest was of -4.3% to the South African rand, which led the way on three successive days.
Inflation regains its importance
During the reign of quantitative easing the inflation data have tended to be overlooked by investors: Inflation in many developed countries has been so low that minor changes here and there have been seen as insignificant to the course of monetary policy. Three events in the last week suggest this is no longer the case.
Sterling was a casualty last Tuesday when British CPI inflation printed a tick below forecast at 0.6%, making the pound an all-round loser on the day. The US dollar encountered the opposite effect on Friday when US inflation unexpectedly came in a tick higher than expected at 1.1%, contributing to a weekly gain of three cents for the dollar against the pound. This Tuesday morning the euro moved higher after the annual decline in producer prices – factory gate prices – slowed from -2.0% to -1.6%. The euro is a net two cents higher on the week.
The good news
Apart from the narrow miss by inflation the week’s UK economic data were by and large alright. Unemployment was steady at 4.9% and the 74.5% employment rate (the number of people working relative to the number of people of working age) was the highest since the calculation was first made in 1971. All the August measures of retail sales beat forecast and sales were up by an entirely respectable 6.2% on the year.
The bad news
The Brexit dragon re-emerged from its lair, scattering sterling’s supporters. Whilst there is still no word from the government as to how the process will proceed, frequent use of the expression “hard Brexit” made investors uneasy. They felt even more nervous on Friday after reports that chancellor Philip Hammond had accepted that Britain would have to give up membership of the EU’s single market if limits were to be placed on migration. EU president Donald Tusk fed the same fears when said the Article 50 exit process would begin in January or February.
The Australian dollar was able to dodge another of its uncomfortably frequent sets of whacky employment data. This time it seemed that the loss of 4k jobs in August had led to a fall in the rate of unemployment from 5.7% to 5.6%. The Aussie also received some help from the minutes of the Reserve Bank of Australia board meeting, which implied that discussion of lower interest rates was no longer on the agenda. The Aussie strengthened by four cents on the week, dragging the Kiwi in its wake for a gain of three and a half cents.
Uncertainty in Tokyo and Washington
The two most important events this week will be the policy decisions made by the Bank of Tokyo and the Federal Reserve on Wednesday. Although the consensus among central-bank-watchers is that both could well leave policy unchanged, there can be no guarantee that this will be the case. It is possible that the BoJ will come up with new and inventive ways to print more money or that the Fed will deliver the rate increase that few expect.
Sarah, Senior Account Manager at Moneycorp
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