Build ‘em up to knock ‘em down
On Wednesday it was sterling’s turn to bear the brunt of market inconstancy. Having taken joint first place the previous day it shared the wooden spoon with the Swiss franc yesterday. Neither move had any credible justification.
The pound’s downward journey began after the release of the UK consumer price index data for July but there wasn’t necessarily a correlation between the two: all five of the inflation readings, monthly and year-on-year, were higher on the month and above forecast. “Core” CPI inflation, which ignores seasonal and otherwise volatile components such as food and energy, was up from 1.4% to 1.8%, fairly close to the 2% target. Nothing in the numbers pointed to inflation-driven easing by the Bank of England.
Other than to pass it off as a reaction to a month-long run of mostly unjustified gains, there is no explanation for the pound’s decline on Wednesday. Nor was there any clear reason for the fall of the Swiss franc, which followed it all the way down even as the yen strengthened by an average of 0.2%.
Knock ‘em down to build ‘em up
As the pound took its undeserved bath the US dollar enjoyed equally unmerited success, leading the second-placed Canadian dollar by a third of a cent. It strengthened by a cent and a half against the unfortunate pound.
As with everything else at the moment, the dollar’s initial gains seemed unrelated to any economic data or news. The minutes of July’s Federal Open Market Committee meeting gave it an added boost during the evening and, even there, the logic was at best sketchy. It seems that investors had been expecting the Fed to be more specific about how many months/weeks/decades it would keep rates at zero. The Fed failed to oblige, citing Covid uncertainty, so it managed to appear less dovish than investors had hoped. US equities went down and the USD went higher.
The Loonie scraped into second place despite a slowdown in headline inflation from 0.7% to 0.1%. Investors seemed to set more store by Canada's US economic links than by the off-chance of unexpected easing from the Bank of Canada. In third place the JPY was snapping at the CAD’s heels, in defiance of weak Japanese ecostats earlier in the day. Down in midfield, in fifth behind the NZD, the euro was unmoved by confirmation that inflation was almost unchanged at 0.4% in July.
Retail sales and PMIs
Friday will be a busy day for sterling, with July’s retail sales and public sector borrowing, and the provisional purchasing managers’ index readings for August. Attention today will be on weekly US jobless claims, in particular whether initial claims remain below a million.
There are central bank rate announcements today from the People’s Bank of China, which stuck at 3.85 for a fifth month, and Norges Bank, which is expected to be unchanged at 0%. US initial jobless claims are forecast to be a touch fewer at 925k with continuing claims at 15 million.
All of Friday’s provisional PMIs are expected to be in the growth zone above 50, with UK manufacturing and services at 53.8 and 57.0. UK public sector borrowing is predicted to have fallen further from April’s £48 billion peak but will still be eye-watering in comparison with previous years. Retail sales for July are forecast to be 2% higher on the month and unchanged from the same month last year.