Make Britain great again

Dear Santa

Theresa May's Brexit speech was not the only notable event on Tuesday but it was by far the most important for sterling. In it, the prime minister set out her aims in the negotiations to leave the European Union. Of necessity, it was a wish list. Nevertheless it went down well with investors. 

They were relieved that the government had at last set out roughly what it wants to achieve and that it "has a plan". Investors liked the idea of a phased implementation of any changes, avoiding the feared cliff-edge, and they were happy that parliament will have a vote on the eventual deal. Nothing among Ms May's 12 points came as a complete surprise except, perhaps, her nuclear threat to walk away completely if the only deal available were to be a "bad" one.

During the course of the speech and subsequent Q&A sterling strengthened by about a cent against the euro and the US dollar. It continued higher until the evening and starts this morning an average of 1.6% firmer on the day. It is up by two and a quarter US cents and one and a quarter euro cents.

China and the States

China's president Xi Jinping delivered a speech to the World Economic Forum and the market picked up belatedly on comments made by America's president-elect Donald Trump during an interview. The former was of potentially strategic significance: the latter rang alarm bells for the market.

As Mr Trump was framing his plans to pull down the shutters on America's trade agreements Mr Xi was making a statesmanlike case for globalisation and free markets. He said "protectionism is like locking oneself in a dark room" and "no one will emerge as a winner in a trade war". It is intriguing that communist China could replace the United States as the global champion of free trade.

At the weekend, in the context of a discussion about a new "border adjustment" tax, Mr Trump said the dollar was already "too strong". His comment appears to signify the end of a two-decades-old "strong dollar" policy. Be prepared for his tweets to generate volatility for the dollar in coming months and years.

Inflation and jobs

Tuesday's UK inflation figures, which were higher than expected, were overshadowed by the prime minister's Brexit speech. There will be no such distraction from today's employment data.

Britain's consumer price index was up by an annual 1.6% in December, beating the forecast 1.4%. Euroland and the States report on inflation today. Germany is already in at 1.7% and for the euro zone as a whole analysts are looking at an unchanged 1.1%. US inflation is expected to have accelerated from 1.7% to 2.1% in December.

UK unemployment should come in at or close to 4.8%, with a small rise in the number of jobseekers. The figure that matters most will be the increase in weekly earnings. Anything above 2.6% would be positive for the pound.