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Race to the bottom

Über-dovish Fed

There was a tussle between the pound and the US dollar yesterday as each fought to be more unattractive than the other. It was sterling that eventually won the dubious accolade but not before the Fed and the US president had done their best on the dollar's behalf.

In circumstances reminiscent of the European Central Bank a fortnight ago, the Federal Reserve chairman and his team managed to out-dove the already dovish expectations of investors. Growth forecasts were cut from 2.3% to 2.1% for this year and from 2% to 1.9% for 2020. More importantly, every word and document pointed to no rate increase this year, to the extent that investors now see almost a 50/50 chance of a cut in the next 12 months.

Trump further muddied the waters when he spoke of maintaining tariffs on Chinese imports "for a substantial period of time". The overall effect was to send the dollar lower. It lost three quarters of a euro cent, one yen and fell an average of 0.9% against the other majors.

It's not me, it's you

The UK inflation data on Wednesday morning were helpful enough to the pound. The political narrative was not. The prime minister asked the EU for a three-month extension to Article 50 and the day would end up with her appearing on television to blame MPs for the chaotic Brexit situation. Investors were not impressed.  

They were not impressed that the PM asked for only a three-month extension. They were not impressed when the EU president said an extension would depend on parliament passing her withdrawal bill. And they were not impressed when Theresa May antagonised the very people whose assistance she needs for successful passage of the bill. The prime minister gave the impression that she would rather take Britain out of the EU without an agreement than upset the Eurosceptic wing of her party.

There is no reason for panic though:more than a week remains until the 29 March deadline and parliament has already shown willingness to roll up its sleeves and get involved. But the messaging was not good and investors decided they liked sterling even less than the US dollar. It lost an average of 1.2% and added another wooden spoon to its growing collection.  

Retail sales and the Old Lady

The normally important UK retail sales data today - good or bad - are likely to be overshadowed by the unfolding Brexit story. For what it's worth, analysts see a 0.4% decline in February. The Bank of England's rate decision should be another damp squib. Yesterday's uptick in inflation to 1.9% will make no difference whatsoever to the bank's decision to leave rates unchanged.

The overnight Australian employment data were helpful to the Aussie but not greatly so. A smaller-than-expected 4.6K increase in jobs was offset by a fall in unemployment to 4.9%. Rate decisions in Europe today are expected to leave the Swiss National Bank steady at -0.75% while Norges Bank tightens by 25 basis points to 1.0%

GBP Lower after prime minister threatens no-deal Brexit

GBP Lower after prime minister threatens no-deal Brexit

USD Lower after Fed says no rate hikes this year

USD Lower after Fed says no rate hikes this year

NOK Nervous ahead of Norges Bank rate decision

NOK Nervous ahead of Norges Bank rate decision

AUD Average performance following reasonable employment data

AUD Average performance following reasonable employment data

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