Sterling Goes from Zero to Hero – 17th August 2016

Sterling Goes from Zero to Hero

Sterling soared yesterday, swapping places with the South African Rand, to go from Monday’s Zero to Tuesday’s Hero and vice versa. Sterling went up by 2.4% against the Rand and by nearly 1% against the other dozen most actively-traded currencies. Ostensibly, Sterling’s upward move was the result of Tuesday morning’s UK inflation data. Every one of the 12 numbers involved was either in line with expectations or higher, with the headline rate a tick above forecast at 0.6%.

It has to be said, though, that the figures were not sufficiently compelling on their own to provoke such a reversal of Sterling’s recent fortunes but it was helped by two other events on Tuesday. The first helping hand came from US inflation data, which was lower than analysts had predicted. The second was the Bank of England’s bond-buying expedition, which was far more successful than last week’s effort.

US inflation came in at 0.8%, down from the previous month’s 1.0% and below the forecast 0.9%. The numbers were seen as reducing the upward pressure on interest rates so the dollar was marked down. In London, when the Old Lady set out to buy £1.17bn of 15-year-plus government bonds the sellers flocked to her door, unlike last Tuesday when they stayed away in droves.

Later in the day the US Dollar reacted hardly at all to a comment by Bill Dudley, the president of the New York Fed, when he told a TV interviewer “We’re getting closer to the day when we’re going to have to snug up interest rates a little bit”. Perhaps “snug” and “a little bit” did not sound forceful enough for a September rate hike.

Half of today’s serious data are already done and dusted: Unemployment in New Zealand ticked down from 5.2% to 5.1% in the second quarter with a 2.4% increase in the number of workers. The UK jobs numbers come out this morning and the Federal Open Market Committee publishes the minutes of July’s meeting after tea.

Most of the UK employment data relate to June, so are not affected by the Brexit vote. The only July figure is for the change in the number of jobseekers. This evening’s FOMC minutes are the closest investors get to guidance on when rates might rise so are important.