Respite needed

Sterling's plunge

Following Thursday night's sharp -2% fall it would have been fair, under normal circumstances, to expect the pound to stage some sort of recovery the following day. But sterling's current circumstances are far from normal and instead it lost another -0.6% of its value on Friday.

The Bank of England is investigating the cause of the "flash crash" that took sterling 6% lower almost instantly in early Far East trading on Friday. The three most likely candidates are a computer-powered algorithm, an input error by some trader pressing the squillion button instead of the million one or a deliberate attempt by one or more of them to stampede a thin and illiquid market. Whatever the cause, its effect was dramatic.

The most worrying aspect for sterling's supporters, however, is that the move was not reversed by investors when they spotted the apparent anomaly.  Yes, the pound did quickly recover much of the lost ground but it still fell by an average of nearly 2% between Thursday morning and Friday morning. There's an awful lot of investors out there that don’t want to buy sterling even when it might look artificially cheap.

Output, trade and jobs

Sterling's continued decline on Friday in London was easier to understand: the UK economic data were uniformly disappointing. The US employment data that came out after lunch were disappointing too, but not sufficiently so to be of any help to the pound.

British manufacturing production was up by 0.2% in August and the broader industrial production, which lumps manufacturing together with mining and energy outputs, was down by -0.4%. The £4.7bn trade deficit for the same month was more than double that of July. All but one of the figures was below forecast: only the trade deficit was bigger than expected.

US employment data showed unemployment ticking up to 5.0% as nonfarm payrolls increased by 156k in September. Disappointment arose because unemployment was supposed to have been steady at 4.9% and there should have been at least 170k new jobs. If the numbers did not exactly scupper the prospect of a rate hike in December they didn't improve it either. The US dollar was the second weakest performer on the day, adding just a quarter of a cent against sterling.

Hiatus?

With Japan and North America on holiday today the FX market got off to a slow start and activity is likely to peter out after lunch. There are no UK ecostats on the agenda before tonight's BRC retail sales figure for August.

Ahead of London's opening Switzerland reported a fall in unemployment from 3.4% to 3.3% and German data showed the trade surplus widening to €22.2bn in August. The only serious figures yet to come are for Norwegian producer and consumer prices, though the Sentix index of Euroland investor confidence will be vaguely interesting.

The lack of stimulus may give sterling the space it needs to recuperate. Or provide investors with time to concentrate on selling it.