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Central bank week

The 39 years

On Friday, sterling (GBP) pulled back some of the losses it incurred earlier in the week. Although it could not repeat Thursday’s win it did make third place behind the NOK and AUD. Ahead of London’s opening today, it was an average of 0.6% lower on the week and just about unchanged against the USD and EUR.

There was much talk of inflation at the end of last week. In Norway (NOK) it rose to 5.1%, the highest since 2008. Germany’s 5.2% (EUR) (HICP 6%) was the highest since 1992. The one that really mattered, though, was the United States’ 6.8% (USD). That was the highest since 1982. Astonishingly, the US figure was met with relief in equity markets because there had been fears that it would be even higher.

Inevitably, there have been comparisons in the media between the current situation, with US interest rates close to zero, and 39 years ago, when the federal funds rate was just shy of 15%. Back then, both the inflation rate and the funds rate were on their way down. Today, central bankers around the world maintain that inflation will come back to earth without the need for aggressive policy action. On Friday, investors were in two minds about the whole thing: the NOK barely reacted to the inflation print – its gains came mostly as a result of higher oil prices. The USD lost ground on the basis that a higher number would have put more pressure on the Fed to tighten policy.

 

Improved confidence

Other than the inflation data, there was not much among Friday’s ecostats to interest investors. American consumers were more upbeat, and that was about it.

After an unexpectedly soft reading in November, the provisional Michigan index of consumer sentiment (USD) recovered to a provisional 70.4. It hardly qualified as a rebound though; the reading was still below the range seen in most of the last decade.

In Britain, the Bank of England’s (GBP) quarterly survey of inflation expectations revealed that the public are quite switched on about the state of play. When asked to give the current rate of inflation, the median answer of 3.7% was impressively close to the 3.8% reported most recently for CPIH. Looking ahead, median expectations for inflation in 12 and 24 months’ time were 3.2% and 2.4%.

 

Looking ahead

Today’s unusually brief agenda offers a gentle start to the week. As far as sterling is concerned, the only thing on offer is the Bank of England’s financial stability report (GBP), a topic that seldom registers on investors’ radar.

This morning’s Business NZ performance of services index (NZD) was a point and a half higher on the month in November at 46.5, still below the line at 50 that separates growth from contraction. A better result is expected this month, as a result of less draconian Covid restrictions. NZ visitor arrivals (NZD) were up by more than a quarter on the year. The UK employment figures (GBP) appear ahead of London’s opening tomorrow.

The important action this week relates to central banks and monetary policy. The Federal Reserve (USD) is first up, on Wednesday evening. No change to interest rates is expected, but investors assume the Fed will announce a faster pace of tapering for its asset purchase programme. Thursday will be a busy one, with rate decisions from the Swiss National Bank, (CHF) the Bank of England (GBP) and the European Central Bank (EUR). The Bank of Japan (JPY) follows on Friday.

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