Governor looks ahead

Dollar trails after FOMC

Although, ahead of the announcement, much was made of the Federal Open Market Committee's policy decision yesterday the event itself was predictably anticlimactic. The Fed will "maintain the target range for the federal funds rate at 1/4 to 1/2 percent" for another six weeks. But what then?

A comment in the Fed's statement that "the case for an increase in the federal funds rate has continued to strengthen" was enough to keep alive the hope - or fear - that the FOMC will deliver a rate increase next month but it did not amount to a commitment. Financial markets were left in very much the same situation they had been in before the statement: expecting a December rate hike but not certain of one.

Investors were underwhelmed to the extent that the US dollar was the weakest performer among the major currencies on Wednesday, losing four fifths of a cent to sterling. Over the last seven days it is also the back marker with a -1.0% loss.

A different pound

The Egyptian pound is pegged by the central bank at a rate of E£8.8 per US$1. A weak economy and high demand for imports mean the official rate has little bearing on the real pound cost of foreign currency to people and businesses. At the weekend its street value was down at E£18 per dollar. 

Since the ousting of President Mubarak five years ago the Egyptian pound has been devalued three times, reducing its official value by nearly a third. Now it seems that another devaluation could be imminent, such is the divergence of the black market price from the official rate. It is possible that the government and the Central Bank of Egypt could go all the way and allow the currency to float freely.

The CBE is also expected to tighten the rules for foreign currency bank deposits, requiring proof that foreign-denominated hard cash was obtained through legitimate channels. Its aim would be sharply to reduce the influence and impact of the black market.

Carney and the QIR

Fresh from the declaration of his ongoing commitment to Brexit Britain the governor of the Bank of England will today present the bank's quarterly Inflation Report. Mark Carney might also have to justify a lower Bank Rate and increased asset purchases but most analysts think that unlikely.

Recent UK economic data have been punchier than feared by some economists following the EU referendum. Whilst the governor did hint at a second rate cut this year investors would be surprised to see one today, given the weakness of sterling. What investors will get, either way, is his spin on the bank's forecasts for growth and inflation. Dr Carney is unlikely to talk up the pound.

Two other sterling-sensitive events today are the high court's verdict on the execution of Article 50 and the purchasing managers' index for Britain's services sector. The Article 50 decision will be appealed whichever way it goes.