Sterling reversal

26 October, 2016

What we saw in sterling yesterday was instructive of the dilemma that may face other central bankers before long. Carney played down expectations of a further easing in policy before the end of the year, as was strongly suggested in August when they eased policy in the wake of the Brexit referendum. The suggestion was that it was becoming a finer balance for the MPC in terms of their ability to look through the anticipated overshoot of inflation on the 2-3 year forecast horizon. The depreciation of sterling is naturally playing a part in this. I mentioned yesterday about the declining volatility being seen, especially on sterling and this largely remains in place, with the recovery seen yesterday on the Carney comments still coming within a relatively tight range.

Elsewhere, inflation data in Australia was firmer than expected, the headline rate rising to 1.3% (from 1.0%), with allowed the Aussie to move towards the upper end of the recent range. The Aussie has performed relatively well during the month so far and this unwinding of rate cut expectations should see underling support continue. For today, focus remains on services PMI and new home sales in the US, but as mentioned yesterday, the dollar’s sensitivity to data is falling given that a December rate hike is largely priced in. For now, we remain in a holding pattern ahead of the US Presidential election.


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