Daily Brief

Tough dove

Up as well as down

A second lucky win for sterling, once again in company with the Japanese yen, left it an average of 0.7% higher against the other major currencies with no losses. Also for a second day, its average rise equalled its gain against the Swiss franc, in this case seven eighths of a cent.

There can be no doubt that the pound began to move higher following the UK inflation data for August. By mid-afternoon it had taken a cent or more off the US dollar and euro. There is considerable doubt, however, that one led to the other: It took an hour and a half for sterling to get going following the ONS press release.

It is possible, then, that Wednesday’s move was an extension of Tuesday’s blind faith rally, in expectation that there will somehow be a post-Brexit trade deal. That faith was dented by another ministerial resignation, this time from the advocate general for Scotland. The Prime Minister has recognised Tory dissent regarding his internal market bill, but the PM is said to have reached a compromise and agreed a deal with rebels in his own party.  


Only three more years

Investors wanted to see Federal Reserve dovishness layered on with a trowel yesterday evening and they were disappointed. The USD strengthened after the Fed chairman’s press conference, apparently because he only pledged to keep interest rates close to zero for three more years.

The statement from the Federal Open Market Committee said everything that could reasonably have been expected. Notably, it will not take the funds rate above its current 0%-0.25% target until there is “maximum employment” and inflation is threatening to exceed 2% “for some time”. The accompanying economic projections show only one FOMC member expecting to see the funds rate rise above 0.5%-0.75% before the end of 2023. Chairman Jerome Powell does not foresee any tightening of policy until the recovery is “very far” along.

Investors’ reaction was to take the USD higher because Powell & Co had not been dovish enough. The dollar took a close third place behind the GBP and JPY for an average daily gain of 0.7%. It did so despite a disappointing 0.6% monthly rise in US retail sales.


More central banks

The Bank of England and the South African Reserve Bank will make interest rate announcements today. Analysts expect them to follow the lead of the Bank of Japan this morning and leave policy unchanged.

Whilst it is easy enough to find advocates of even greater policy relaxation, the consensus is that the Old Lady will make no changes at today’s MPC meeting. That is also the official line on the SARB decision, though the outcome there is more finely balanced.

On the ecostat agenda Australia led off this morning with the employment figures for August. They were briefly of help to the AUD but the Aussie is a cent and a half lower on the day. There is inflation data from Euroland this morning and Japan tonight. Friday’s important numbers are UK and Canadian retail sales, and the provisional Michigan index of US consumer sentiment.

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