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The dollar handed back its post-inflation rally overnight, and unexpected UK growth in August has given the pound a lift against it.
It has been a strange 24 hours for the pound. Yesterday afternoon it slumped to its lowest level against the dollar this year, after figures showed prices in the US rising faster than expected. By this morning it had clawed most of that back, and it is still sitting near its best against the euro in well over a year.
The US numbers were not especially dramatic. Prices rose 3.7% over the year to September, with petrol doing much of the damage. The worry was that prices were also creeping up on almost everything else, from rents to the weekly shop. That is the kind of inflation central banks find hard to ignore, and traders quickly decided the US Federal Reserve was more likely to raise interest rates again this month. The dollar shot up.
Then it came straight back down. Overnight, a report suggested China has been quietly holding on to US government debt through banks in other countries, rather than selling it off as official figures had implied. Nobody has confirmed it, but it was enough to calm nerves about who will keep lending to Washington, and the dollar gave back its gains. Markets that spent the afternoon excited about higher US interest rates seem to have had second thoughts overnight.
Closer to home, the British economy delivered a pleasant surprise of its own. Most forecasters expected this morning’s figures to show it shrank in August after a strong July. Instead it grew, by 0.1%. That is hardly a boom, but it suggests the summer’s momentum has not completely run out. It also makes a Bank of England rate rise in November more likely, with oil still above $100 a barrel and keeping pressure on prices. Good news for the pound, rather less so for anyone hoping for cheaper mortgages.
So the pound starts Thursday in better shape than it might have feared. The question now is whether yesterday’s dollar surge was the start of something or a false alarm, and that depends on whether American shoppers keep spending as prices rise. If they do, a US rate rise this month becomes much more likely. If they don’t, the dollar’s big moment may already be behind it.
GBP: Better growth, cautious Bank
Today’s growth figures give the Bank of England a little more confidence that the economy can cope with a rate rise. Its chief economist Huw Pill sounded more measured in Bangkok this morning, saying a rise now should not be taken as the start of a series of increases. Deputy Governor Sarah Breeden speaks later this morning and Governor Andrew Bailey follows tomorrow, so the pound will soon hear whether that caution is widely shared.
GBP/USD: the past year
EUR: Squeezed from both sides
The euro clawed back some ground overnight as the dollar retreated, but it remains close to its weakest against the dollar since May last year, pressed by US interest rates on one side and France’s budget troubles on the other. European Central Bank (ECB) policymakers gathered in Bangkok sounded readier to act, with Belgium’s Pierre Wunsch suggesting another rate rise will probably be needed, although markets see December as likelier than the 29 October meeting. Tomorrow’s final eurozone inflation figure, expected to confirm 3.8%, will show how much room they have to wait.
GBP/EUR: the past year
USD: Beyond the petrol pump
Petrol costs Americans around a third more than a year ago, but what lifted the dollar yesterday was pressure in the parts of the inflation basket that have nothing to do with fuel. This afternoon’s producer prices, retail sales and weekly jobless claims will show whether that pressure is building further up the supply chain and whether shoppers are still spending through it. Federal Reserve chair Kevin Warsh speaks tomorrow, the last chance to steer expectations before the Fed’s meeting on 27–28 October.
USD/GBP: the past year
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 3918 7255 or your Private Client account manager on 020 7898 0541.
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 3918 7255 or your Private Client account manager on 020 7898 0541.
