Sterling extended its recovery on Wednesday despite a fairly public disagreement in Davos between Chancellor of the Exchequer Sajid Javid and his US opposite number Steve Mnuchin. Investors concentrated instead on an upturn in manufacturing business optimism.
The pound was pottering along yesterday morning, untroubled and unmotivated by a slightly lower-than-expected figure for UK public sector borrowing, when the CBI published its Industrial Trends Survey. The monthly survey does not usually generate much interest, let alone much movement, but this one caught investors' imagination. It showed a major swing from pessimism to optimism; the biggest since the survey began in 1958.
Coupled with Tuesday's positive employment data, the survey further dented expectations of a Bank of England rate cut next week, knocking the probability back down to 50/50. By the end of lunch, the pound had added over half a US cent. It is up on the day by half a Swiss cent and has taken two thirds of a cent each from the US dollar and the euro. Sterling is an average of 1.1% higher than a week ago.
Canadian affairs rather dominated the postprandial London session. Headline inflation was unchanged at 2.2% in December and the Bank of Canada left its benchmark interest rate unchanged at 1.75% for a 16th month. Neither was a surprise, but investors took against Governor Stephen Poloz's statement.
At the governor's last outing a fortnight ago, he had been non-committal about monetary policy. Yesterday he showed a distinct shift towards dovishness, noting weakness in exports, investment, confidence and employment. Despite positive developments on the trade front south of the border, there is still "a high degree of uncertainty" about the economy. As a result, the Loonie was the weakest among the major currencies, losing two cents to sterling and half a US cent.
Where the Loonie lost in the afternoon, the Aussie triumphed overnight. Although it lost two fifths of a cent on the day against sterling it was neck-and-neck with the yen for second place. It was the Labour Force report that made the difference. Almost 29k new jobs were created in December and unemployment touched a nine-month low of 5.1%. Even though all the new jobs were part-time, investors did not mind: they might be enough to prevent the Reserve Bank of Australia cutting rates in two weeks' time.
European rates on hold
There are two more rate decisions today, from Norway's Norges Bank and the European Central Bank. In both cases, the expectation is for no change. New Zealand's quarterly inflation figures come out tonight and tomorrow brings the provisional purchasing managers' index readings.
Whilst the ECB is unlikely to make any change to monetary policy today, it is expected to announce a strategic review of the aims of that policy. In the review, "every stone will have to be turned and every option will have to be examined". It is likely to take until the end of the year.
With tomorrow's provisional PMIs the gap between Euroland and the States could well narrow as Europe regains momentum. The UK readings are forecast to be 48.8 for manufacturing and 51.0 for services.