Inflation trips sterling

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When the Fed chairperson visited Capitol Hill yesterday the Senate Banking Committee wanted her to tell them all about the likely effects of the new administration's plans for the economy and bank deregulation. Her response was guarded but she did allow that interest rates will still be going up.

On the impact of economic policy changes Janet Yellen said "We don't yet have enough clarity on what changes will be put in place to really clearly factor those policy changes into the economic outlook". Asked for her opinion of the proposed border tax she said "I'm not going to tell you that either". Will she increase interest rate in anticipation of Donald Trump's proposed tax cuts and infrastructure investments? No: "We are not basing our judgments about current interest rates on speculation."

However, the Fed chief gave every impression that rates are on their way higher, come what may from the White House. She did not commit to an increase next month but did leave the possibility alive: "Waiting too long to remove accommodation would be unwise", she insisted. The US dollar responded positively to her testimony. It was the day's second best performer, strengthening by a third of a cent against the euro and by half a Japanese yen.

No imminent BoE move

Sterling narrowly avoided the wooden spoon, which went instead to the yen. Investors did not take kindly to CPI data that showed UK inflation accelerating to 1.8% instead of the expected 1.9%. The pound lost an average of -0.5% to the other dozen most actively-traded currencies.

It was not a big miss but it was quite enough to dispel any notion of an early move by the Bank of England to increase rates. The figure cost sterling three quarters of a US cent on the day and it was down by a quarter of a euro cent.

The top dog for a third day was the rand. Strong South African employment data took it nearly 2% higher, leaving it 3.2% ahead on the week against sterling and near a 15-month high against the US dollar.

British jobs

A fun-packed agenda today includes South African and US inflation, UK employment and US retail sales. Janet Yellen will make another trip to Capitol Hill, this time to face the House Financial Services Committee.

The addition of a few hundred jobseekers is expected to leave the UK unemployment rate at 4.8%. Of arguably greater importance is the forecast 2.8% annual increase in average earnings. The current logic has it that, almost whatever the rate of unemployment, endogenous inflationary pressure will remain subdued as long as wage growth is slow. And that means little pressure on the Bank of England to raise interest rates. Sterling is weak: raising rates would not make imports any cheaper. 

Ms Yellen's responses to the House committee will be broadly similar to what she told the Senate. Analysts will be listening carefully for any change in nuance.