Sterling rallies again as Carney rules out further Quantitative Easing

Tom Tong30/Sep/2013Currency Updates

G10 currency markets continued to move in the tight ranges of the past few weeks, with the exception of sterling. The pound continued to outperform most major currencies save the yen. Bank of England’s Carney comments acknowledging recent economic strength and ruling out further QE for now stering higher against both the euro and the dollar. Meanwhile, equities and emerging market currencies gave up most of the gains they had enjoyed on the back of the Fed’ s decision not to start tapering down open-ended asset purchases. Focus now shifts to the looming showdown between the most recalcitrant wing of the Republican Party and the White House in the US, where a partial Government shutdown is threatened as early as tonight.


Economic data out of the UK last week was a shade softer than expected. July services output was nearly flat, which is a disappointment given the surge in economic sentiment we had been witnessing. This gap between sentiment indices and actual data bears watching, although it must be remembered that UK output data are considerably more volatile and subject to revisions than the PMI indices. At any rate, focus last week was on speeches by no fewer than four MPC members. Particularly important were Carney’s comments suggesting that further QE is off the table for the foreseeable future, and that the Bank of England will focus on watching the data for now. The relative hawkishness of the BOE compared to central banks across the Channel and the Atlantic buoyed sterling to new multi-month highs versus both the common currency and the greenback.


As in the UK, we are beginning to see a certain decoupling between stronger sentiment data and lagging actual output indicators. PMI business sentiment rose again in September, to 52.1 in the composite index; the rise was broadly based both across sectors and countries. These numbers do not match well with the weakness we saw the previous week in industrial production, as well as with the absence of any improvement in employment either in the eurozone as a whole or, critically, in the big peripheral labour markets – Spain and Italy. We think that ECB’s President Draghi also shares our concerns, and this explains the very cautious reaction of the ECB to the improving sentiment numbers. Markets also turned somewhat more cautious on the euro after the Fed-driven rally of the previous week, and the Euro ended the week slightly down against the dollar. All eyes turn now to the ECB meeting next Thursday.


Economic news out of the US were generally positive last week. Jobless claims, possibly the best high-frequency indicator of economic health, hit a new cycle low last week, down to 305,000. Manufacturing sentiment data rose strongly, pointing to solid growth in this sector. Finally, positive housing data indicated that buyers may be adjusting to the new, higher mortgage rates better than we had been expected. All these second-tier indicators will, however, be overshadowed this week by the two developments that the Fed is clearly most concerned with. First, the possibility of a partial Federal Government shutdown brought on by the intransigence of the right wing of the Republican Party in Congress, which seems intent on forcing its leadership into a damaging showdown with both the Senate and the White House. Second, the critical payroll report for the month of September. The latter one will probably drive the FOMC decision on whether to start tapering later in October, always assuming that the showdown over the budget and the debt limit does not result on damaging ad hoc cuts on Federal spending or concerns about the timely payment of coupon and principal in US Treasuries. We remain sanguine about both these risks, as we expect that the recalcitrant Republican legislators will be forced to their senses by US business and finance interests.


Written by Tom Tong

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