After an exciting fortnight during which it seesawed between top and bottom slot on the major currency ladder sterling has settled back into the situation with which it is most comfortable and familiar; mediocrity. It was not at the back of the field; that dubious honour went to the New Zealand dollar, which was down by -1.1% against the pound. And it was level with the Canadian dollar. But everywhere else, to a greater or lesser degree, sterling was lower on the week.
Sweden’s krona led the field, helped by strong domestic growth and retail sales data. It strengthened by 2.1% against the pound. The South African rand took second place with a 1.7% gain while the US dollar narrowly beat the euro into fourth, rising by 1.6% against sterling. The pound’s average loss on the week was -0.8%, leaving it -2.0% below its position at the turn of the year. Hmm, maybe to describe it as mediocre is too generous.
Fed 5 – 1 Trump
The US president’s speech to a combined meeting of Congress last Tuesday took investors somewhat by surprise. They usual bombast and bluster was absent and Mr Trump won praise for his presidential tone. Unfortunately that was all forgotten the following day when the Attorney General was found to have been untruthful about his links with Russia during a confirmation hearing.
Meanwhile, another setback for the president was building. At the beginning of the week futures pricing put the chance of a March rate increase by the Federal Reserve at 50%. By the end of Friday that likelihood was as close to 100% as made no difference. The change was the result of senior Fed people, including chairperson Janet Yellen, taking it in turn to stand up and manage expectations in that direction. Between Tuesday and Friday the dollar was the strongest performer, adding a cent and three quarters against sterling and three quarters of a cent against the euro. The result did not exactly play into the hands of the president, who would like to see a more competitive – cheaper – dollar.
Euroland inflation on target
The rebound of oil prices from their low point in February 2016 has put upward pressure on inflation in Euroland, as it has everywhere. Preliminary data for February this year put €Z inflation at 2.0%, exactly where the European Central Bank would like to see it.
In theory that should allow the ECB to consider a reduction in the scale of its quantitative easing programme. In practice, few analysts expect euro interest rates to start moving higher until next year at the earliest. A short-term spike in inflation is possible but broader deflationary pressures should bring it back into line without the need for central bank assistance. When the ECB governing council meets this Thursday it is highly unlikely that it will make any change to current monetary policy.
Sarah, Senior Account Manager at Moneycorp
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