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Inexplicable success

Sterling pulls its boots up

Nobody has put forward an even vaguely convincing fundamental argument to justify sterling’s superiority on Tuesday. But here it is, an average of 0.4% higher against the majors and up by exactly that much – half a cent – against the Swiss franc. The pound can go up as well as down.

As discussed on Tuesday morning, the superficially-attractive UK employment data were both out-of-date and misleading. When Chancellor Rishi Sunak ends the furlough scheme at the end of next month, unemployment will inevitably rise: the only question is by how much. There are considerable doubts that Britain’s Covid-19 testing programme is running as smoothly as government ministers’ claim, and its shortcomings are dampening economic and academic activity. Brexit anxiety remains heightened as a result of the controversial Internal Market bill currently on its way through Parliament. The foreign secretary’s dash to Washington, to reassure the US that the Northern Ireland peace agreement will be upheld, did not increase confidence in a future US/UK trade deal.

Yet despite all this, investors took the pound higher on Tuesday. In the absence of any better argument, it looks as though they are defaulting to their long-standing assumption. They cannot believe that the Prime Minister would deliberately trash the UK economy by ending the transition period without an EU trade deal. Moreover, in this circumstance, nor are they convinced that he will find it as easy as he imagines to bulldoze his bill – at least in its current form - through opposition from his own party.

 

Optimism in some quarters

As sterling made it way higher it faced minimal competition from the major currencies. Elsewhere, it was outdone by the South African rand, which had an unexpected bull-run of its own. The euro took last place, also for no obvious reason, losing three quarters of cent to sterling.

The inflation numbers from France (0.2%) and Italy (-0.5%) were consistent with analysts’ predictions. ZEW’s surveys of economic sentiment among investors in Germany and Euroland found improvement in both cases. Germany was 5.9 points higher on the month, at a 17-year high, while the Eurozone was almost ten points higher.

In the United States the New York Fed’s manufacturing index was back above pre-Covid levels at 17, after a wobble in August. Industrial production delivered its fourth consecutive monthly rise and capacity utilisation edged higher to 71.4%.

 

Central banks

Monetary policy decisions will be at the forefront of investors’ thinking today. In most cases that will mean the economic data which will shape those decisions in the future: in one, the Federal Open Market Committee, it will be the decision itself.

Britain opened the bidding, with its dozen monthly consumer and producer price indices. Headline CPI inflation came in at 0.2%, a little above the forecast 0%. The Bank of England Monetary Policy Committee meets today and tomorrow, with an announcement at midday on Thursday. The Canadian inflation data come out after lunch.

This evening the FOMC is not expected to make any change to policy. The Chairman has made clear on numerous occasions that he is “not even thinking about thinking about” any move away from zero for the funds rate. Investors will be hoping that Jay Powell can come out with something even more dovish but it is hard to imagine how he can out-dove his previous pronouncements.

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