Weekly Currency Brief – 22Aug – 29Aug 2017

Lost in the fog
The dog days of summer were not kind to sterling. During most of August, if it was not on the back foot it was on the ropes. Weak or below-forecast UK economic data served as an excuse for investors to mark the pound down. On the rare occasions that the figures looked half-decent or exceeded expectations they were studiously ignored.

There were two reasons for investors’ rejection of the pound. First, the economic data really were on the mediocre side. Second, the uncertainty surrounding Brexit swirled like the fog around Baskerville Hall. Investors were inclined to blame the former on the latter and they saw no sign of the fog lifting.

Softer treatment
The attitude of investors softened around the bank holiday weekend. Having psyched themselves up to expect a downgrade in second quarter UK growth there was almost relief when the first revision to Q2 gross domestic product left the expansion unchanged at 0.3%. It was still a dismal result: Britain’s economy grew at just half the pace of Euroland. But it could have been worse, and investors found that they had run out of venom.

Sterling also found some respite in a change of heart by the Labour party. It announced that it now favours an indefinite post-Brexit transition period during which Britain would remain in the single market and the customs union. From investors’ point of view this would be infinitely preferable to the crash-and-burn no-deal espoused by some leading Leavers. Investors are aware that it is not in the opposition’s gift to ensure this “soft Brexit” takes place but they hope Labour’s support will give heart to those of a similar mind on the government benches.

Leave them wanting more
At the grandly-named Jackson Hole Economic Policy Symposium the Federal Reserve Bank of Kansas hosts an annual meeting of US and other central bankers. The Fed’s very own chairperson Janet Yellen and the European Central Bank’s president Mario Draghi were the can’t-miss speakers this year. One was supposed to talk about the wind-down of the Fed’s $4.5tr stock of bonds, which it collected during the quantitative easing programme of asset purchases. The other was expected to tell the world that the euro is overvalued.

Neither delivered on those expectations. So investors inferred: a) that the Fed is in no rush to tighten monetary policy and b) that the ECB is not too fussed about the stronger euro. As a consequence the US dollar weakened and the euro went up, touching above US$1.20 for the first time in two and a half years. The jury is out on the question of whether this represents euro strength or dollar weakness but the semantics don’t really matter if that is the way things are heading.