Sterling wins again

Services smile

After a glum day on Tuesday the pound sprang back into life when the UK services sector purchasing managers' index came in a point and a half higher than forecast at 55.0. It was worth a quick half-cent to sterling, which came away as the day's winner.

The PMI commentary noted that "the greatest resilience has been seen in financial services" while consumer-oriented firms such as hairdressers and restaurants were less bullish. "Some companies continued to cite Brexit-related uncertainty as a factor holding back investment decisions." Others said the weaker pound had brought increased demand from foreign customers.

Net gains of two fifths of a cent each against the euro and the US dollar were typical for sterling on the day. It strengthened by an average of 0.5%, that average being inflated once again by the South African rand, which suffered a -1.8% relapse after the ANC endorsed Jacob Zuma's leadership.

Balance sheet blues

The minutes of the March Federal Open Market Committee meeting did not tell investors what they wanted to hear. References to "balance sheet normalization" seemed to imply that rate increases might be treated with less urgency. The dollar weakened slightly after the release of the minutes.

Until now, the Fed has reinvested the proceeds of maturing bonds that it bought as part of its quantitative easing scheme. Total Fed assets are something like $4.5 (American) trillion, most of which consists of bonds it collected during its asset purchase programmes. As the Fed phases out its QE support it will scale back on the reinvestments, effectively tightening policy by cancelling the money those bonds represent.

Investors have no problem in principle with that but they believe that when it starts to happen it will reduce the need to tighten monetary policy through higher interest rates. So there might be fewer rate increases this year than previously thought. 

ECB 'n Xi

Ecostats are rather thin on the ground today. Fortunately, investors will have plenty to keep them busy with a full day's worth of European Central Bank action followed by the meeting between President Xi Jinping and Donald Trump.

First up will be the ECB president, who will be addressing the bank's "Watchers Conference" in Frankfurt. He will be followed by chief economist Peter Praet, who will then jump on a plane to Malta, where he has another speaking engagement this evening. The Watchers will be keen to hear whether the ECB has any inclination to follow the Fed down the tightening trail.

The Trump-Xi meeting has the potential to be much more exciting than the ECB gig. It is scheduled to last two days so they really ought to be able to come up with some agreement to wave at the media. What they won't be doing, though, is golfing: As part of his anti-corruption campaign President Xi has cracked down on party officials playing golf. But "it's possible they might walk around a bit, as the mood strikes."