No Sign of Life from Draghi
Now that August is over, the euro zone is theoretically back at work. There have been no signs of life at the European Central Bank however, and no word from Mario Draghi. His next scheduled appearance is at a press conference next Thursday. Draghi will explain what the bank is doing about inflation – which is provisionally reported to have slowed to 0.2%. Investors have no idea what he might have in mind, hence the euro’s lacklustre performance: It lost nearly a cent to the US dollar.
Investors Left to Speculate
“I believe the case for an increase (in the Fed’s benchmark borrowing rate) has strengthened in recent months.” These are the words investors were left to contemplate last Friday, following Federal Reserve chairperson Janet Yellen’s eagerly anticipated speech. Her comments certainly weren’t a shock to the markets, but investors were left speculating on the time-frame for another interest rate hike. On the one hand, they supported the expectation of a hike next month; on the other they allowed for the possibility of continued stasis before Christmas.
Stanley Fischer Says Yes
A less ambiguous tone from Stanley Fischer the Fed vice chairman, in the immediate aftermath of Ms. Yellen’s speech and again on Tuesday, gave investors the hint of direction they were craving. Asked on Friday whether investors should be ready for a September increase and, maybe, another in November or December – Mr Fischer said, “Yes to both questions.” The US dollar responded by edging higher against both the pound and euro.
Euro Loses to the Pound
The euro lost a cent and a half to the pound – the week’s top performing major currency by a goodly margin. Sterling topped the table on three consecutive days, helped by better-than-expected UK economic data. Speculators seem to be pulling back and holding their fire until they know what Brexit means. And ‘Brexit’ is not a good enough answer.
It appears the UK economy is more resilient to Brexit fuelled uncertainty than many economic forecasts would have us believe. Evidence emerges proving optimism is returning after the initial shock of the result. Following recent upbeat retail sales and benefit claimant data, it was the turn of Tuesday’s Gfk index of UK consumer confidence to prove post-Brexit Britain certainly isn’t all doom and gloom. Like its US counterpart, the measure was quite a bit better than expected – rebounding by five points from its post-referendum trough. It came too late to send sterling higher, but only because the pound had already put in the day’s best performance – strengthening by an average of 0.5%, adding a third of a euro cent. Despite UK data showing consumer credit and mortgage approvals falling in July.
The pound has become so used to looking over its shoulder for the next piece of bad news since the Brexit vote. It was probably pinching itself on Wednesday morning however, after the release of yet more positive economic data. The Nationwide house price index revealed that prices rose by 0.6% in August, and were up by 5.6% on the year.
Britain’s Manufacturing Industry Forges Ahead
Perhaps sterling should by a lottery ticket? Its good fortune didn’t end there either. The pound surged to a four-week high against the euro and jumped by 1% – more than a cent – against the dollar on Thursday. The latest round of upbeat post-referendum economic data lent further support to the notion that the Brexit brakes are off. The gains were a direct result of Britain’s robust manufacturing industry, which has rebounded strongly from its initial post-Brexit downturn. According to IHS Markit, the purchasing managers’ index (PMI) for the sector climbed from 48.3 in July – the lowest level in almost two years – to 53.3 in August; comfortably beating expectations of a 49 reading and reaching the highest level in 10 months – a figure in excess of 50 indicates expansion.
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Contact – Henry Bliss on +44 203 823 0203 or email henry.bliss@moneycorp.com
