The data don’t work
Every one of the UK economic statistics that could look bad for sterling did look bad for sterling. It began with the industrial and manufacturing production data, both of which declined further in March. Britain’s trade deficit for the same month was wider than expected. The National Institute of Economic and Social Research estimated that the economy grew by just 0.2% in the April quarter. Consumer price index inflation rose to 2.7% in April and the old Retail Price Index measure jumped to 3.5%.
Under normal circumstances rising inflation is positive for a currency because it implies tighter central bank policy; higher interest rates tend to attract more buyers. In the case of sterling, however, there is little chance that the Bank of England will react to what it sees as a temporary inflation spike. At the May meeting of the Monetary Policy Committee only one member voted for a rate increase and Kristin Forbes – for it was she – will be leaving the MPC at the end of June.
Waning spending power, waning pound
Figures later this week are expected to show average earnings increasing by an annual 2.4%. With prices up by 2.7% (CPI) or 3.5% (RPI) on the year it means less spending power for households and that, in turn, has negative implications for the economy.
The upshot of all this negativity was a bad week for the pound. It fell by an average of -1% against the other dozen most actively-traded currencies, losing one euro cent and half a US cent. Sterling shared last place with the NZ dollar, which suffered after the Reserve Bank of New Zealand failed to talk tough about rising inflation there.
White House worries
The reaction of the US dollar to slowing inflation and weaker-than-expected retail sales in the States was entirely conventional. It went down, eventually losing a net half-cent on the week to the euro.
Its woes were compounded by spats involving the president. The first was a seemingly pointless argument about whose idea it was to fire the head of the FBI and why. The second was a rather more serious allegation by the Washington Post that Donald Trump leaked highly-classified security information to Russia. Investors fear that a distracted administration looks increasingly unlikely to be able to gain Congressional approval for the taxation and stimulus measures upon which they had pinned their hopes following Mr Trump’s election.
Euro calm
President Macron’s installation as president of France has done much to reassure investors that Euroland is under control and that populist nationalism is not running riot. His visit to Berlin supported that view when it was claimed that he and Chancellor Merkel would work towards closer integration within the euro zone. Whether they actually will do so is open to debate but investors signed up to the sentiment anyway.
The good news
The week’s strongest performer was the South African rand. It strengthened by a net 3.5%, more than reversing the previous week’s -2.4% loss.
The bad news
South Africa’s rand has to be one of the most financially dangerous currencies to get involved with. On every one of the last eight trading days it was either at the front of the pack or at the rear, with five golds and three wooden spoons.
Sarah, Senior Account Manager at Moneycorp
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