Surprise surprise

No help from the data

On Thursday the US dollar was not looking particularly popular. Investors still found no good reason to buy it and it festered in the rear half of the field. On Friday it suddenly became the flavour of the week and leapt into the lead as equity and bond prices dived.

In essence, decent US economic data on Thursday failed to support the dollar and, the following day, equally good numbers sent it higher. Thursday's key ecostats were the two purchasing managers' index readings from the manufacturing sector. Markit's measure, although unchanged on the month at 55.5, was half a point above forecast. The ISM figure beat expectations by a third of a point, as did the 0.7% monthly rise in construction spending.

On the day the US dollar lost two thirds of a cent to sterling and three quarters of a cent to the euro. The pound was beaten only by the Norwegian krone, despite a dreary manufacturing PMI that trailed expectations by a point and a quarter.

Help from the data

Friday's decisive data appeared in the US Department of Labor's monthly employment report. Nonfarm payrolls increased by 200k in January and average earnings were up by an annual 2.9%. Both figures encouraged investors to continue looking for three rate hikes by the Fed this year.

On the bond and equity front, that prospect spooked the market. Although the Federal Funds rate applies directly only to the money lent from one day to the next, the prospect of it getting as high as 2% in coming months led investors to question whether it would have a knock-on effect further down the yield curve. They came to the conclusion that it would, and that it would make the buying and holding of bonds and shares somewhat less of a no-brainer than has been the case for the last decade.

The same logic persuaded them that the dollar was not, perhaps, as useless as they had spent the last year believing. It strengthened by a cent and a third against sterling and added a third of a cent against the euro. Clearly, one day's price bounce cannot be extrapolated into a watershed moment for the dollar (or for share prices) but it did prove that the dollar can go up as well as down.

More PMIs

The UK PMIs for manufacturing (55.3) and construction (50.2) were lower on the month and below forecast. Sterling managed to escape any ill effects because investors' attention was elsewhere. They would be unlikely to turn such a blind eye if today's services sector reading were also to disappoint.

The services sector is by far the biggest contributor to UK gross domestic product, accounting for four fifths of the economy. Today's services PMI is expected to come in at about 54.2, at which level it would be unchanged on the month.

A lower number would raise questions about the economy. And, of course, about the pound.