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Sterling out of favour

Fright and flight

Investors could not find much reason to buy the pound on Wednesday and they did not waste any time trying. Sterling languished at the back of the field, a fifth of a cent behind the US dollar in penultimate spot, having begun its retreat ahead of London’s opening.

An unscheduled break in the Brexit talks until next week, “very serious divergences” in those negotiations, a report that Britain will not be ready for Brexit at the end of December, the onset of another month of lockdown in England, the possibility of a move towards negative interest rates today: all of these contributed to a lack of enthusiasm for the GBP.

The UK services sector purchasing managers’ index did nothing to lighten the mood. At 51.4 it was a point lower on the month and a point below forecast. There was no single negative lurch for sterling, rather a steady downward ratchet against everything. On our usual 0600h – 0600h basis, the GBP lost an average of 1%, giving up one euro cent, one Japanese yen and three quarters of a Swiss cent.

 

Waiting for a result

As anticipated, there was still no election result from the United States 24 hours after voting ended. The possibility of a Biden presidency has been positive for equities and trade-related currencies but not for the USD, which is an average of 0.8% lower on the day.

While the election remains theoretically too close to call, Joe Biden is said to be statistically closest to victory. As promised, the Trump campaign has begun a series of legal challenges in Wisconsin, Georgia, Pennsylvania and Michigan, but these are thought unlikely to alter the eventual result.

Investors anticipate a Democratic administration and House of Representatives with a Republican Senate. The prospect of higher corporate taxes and the restoration of environmental checks and balances is offset by the likelihood that the Senate will block what it might see as anti-business measures to control big tech firms.

 

Bank opens early

The Bank of England was originally scheduled to publish its monetary policy decision at midday. A resumption of lockdown measures meant suspension of the usual journalists’ lock-in preview and a return to the early 0700h release of the information. (The same will presumably also apply to ONS statistics for the next four weeks.)

As expected, the Monetary Policy Committee kept Bank Rate unchanged at 0.1%. It also decided to increase its asset purchase programme (quantitative easing) by £150 billion to £875 billion, £50 billion more than expected. Sterling reacted positively to the news because the MPC minutes did not point to negative interest rates. The news was worth half a cent to the GBP against the EUR and USD. At lunchtime, the BoE Governor will doubtless have something to say on the subject when he introduces the bank’s quarterly policy report.

The other central bank in the frame today is the US Federal Reserve, which will make a policy announcement this evening. Given the recent election, and especially in view of its uncertain outcome, the Fed will do nothing controversial. It is likely that Chairman Jay Powell will use his press conference to offer his usual encouragement to legislators to come up with more fiscal stimulus.

Today’s US jobless claims and Friday’s nonfarm payrolls number are in theory important to the USD. However, investors are currently preoccupied with the White House race and probably see that as more important than what happened to employment in the last few weeks.

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