Fed and France

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The list of currencies that did not go anywhere on Monday is rather longer than the one of those that did. There were no economic data to get things going and the Federal Reserve chairperson added nothing new to the debate about US monetary policy.

In her speech yesterday evening Janet Yellen explained that the Fed's focus has shifted from stimulus to maintenance. She described the economy as "pretty healthy" and said she expected it to grow "at a moderate pace". The Fed's job is now "to try to set monetary policy to sustain what we have achieved".  Ms Yellen avoided going into any detail about the central bank's plan to wind down the stock of bonds built up during the quantitative easing era.

Investors were vaguely disappointed at the neutral tone of Ms Yellen's comments but they cannot have been too surprised at her failure to dot every I and cross every T for their benefit. The dollar put in a slightly below-average performance, weakening by a third of a cent against sterling and remaining unchanged against the euro, the franc and the antipodean dollars.

Jean-Luc qui?

In the last few days the emergence of a newly plausible candidate for the French presidency has rekindled fears for the future of the euro. Jean-Luc Mélenchon, the most left-wing of the contenders, has come from behind in the opinion polls.

Over the last couple of weeks investors had become relaxed about the prospect of a President Le Pen leading her country out of the euro and back into the franc. They saw it as an unlikely outcome. Now, though, the polls float the possibility of a second round run-off between Marine Le Pen, the radical right-winger representing the National Front, and M. Mélenchon, the radical left-winger backed by the communist party. Victory for either of them would mean a shake-up in the relationship between Paris and the EU, a prospect that is not cherished by investors. 

This new situation has not really affected the euro yet. It could begin to do so if a left/right run-off looks more likely to be delivered by the first-round vote that takes place in less than two weeks' time.


The quality of sterling's day will be determined by the UK consumer and retail prices indices that come out at half past nine. The headline rate of CPI inflation is forecast to be unchanged at 2.3%. Higher or lower readings would be, respectively, good or bad for the pound. In theory.

The only possible problem with that traditional interpretation is wages, which tomorrow's data are expected to show rising by only 2.2%. Investors might look more closely at that mismatch, and its implications for the economy, than at the interest rate carrot of higher inflation.

The other ecostats to watch today are Swedish inflation, Euroland industrial production and ZEW's surveys of German and €Z investor confidence. Japanese machinery orders and the Chinese inflation data come out tonight.