From last Friday morning to this, it was a dead heat between the euro and the British pound according to Moneycorp. Both currencies strengthened by around half a cent against the US dollar and by half that much against the Swiss franc.
America’s Federal Reserve maintained its headline status in the financial media. Chairman Ben Bernanke was offering his opinion about the wind-down of quantitative easing once again, this time as part of his biannual testimony to Congress. Anyone expecting to hear a new slant was disappointed. Mr Bernanke simply reiterated his previous comments; the Fed will scale down its $85bn-a-month asset purchase programme when the US economy no longer needs it, and not before. Try as they might, analysts were unable to read anything new into his remarks but that did not stop them tediously dissecting his every word in the hope of uncovering some previously-unnoticed syntactical sophistry.
If the US dollar was still hogging the headlines the euro was continuing to fly well below the radar. The week’s most exciting Euroland economic statistic was the uptick in CPI inflation from 1.4% to 1.6%. The news had no effect on the single currency according to Moneycorp, partly because it was exactly in line with forecasts but mainly because it will have no bearing whatsoever on European Central Bank monetary policy. Most of the other euro zone ecostats were in line with investors’ expectations too, including an annual -5.1% decline in construction output and a €19.6bn monthly current account surplus. May’s (seasonally adjusted) trade surplus was narrower than expected at €14.6bn but the news left the euro unmoved.
For sterling against the euro there was a major breakthrough on Wednesday morning, when the Bank of England published the minutes of the July Monetary Policy Committee meeting. For several months under the dying governorship of Mervyn King the governor and two of the other eight members had been outvoted in their effort to extend the Asset Purchase Programme, which currently owns around a third of all the UK government bonds in existence. The arrival of Mark Carney led investors to believe this effort would continue under the new guy; the only question in their minds was whether more members would be converted to his assumed view.
There was considerable surprise, then, when the minutes showed a 9-0 vote against more asset purchases. It is possible, of course, that the new governor wanted to avoid defeat in his very first MPC meeting and that the committee agreed to put on a show of unity for his benefit. But whatever the motives, the outcome was well adrift of investors’ expectations and they responded positively, sending the pound instantly higher. Sterling’s gains were extended on Thursday after the UK retail sales data came in slightly stronger than forecast.
In the last couple of months the euro outperformed the pound not because investors were particularly enamoured of the common currency but because they nursed a dislike for sterling and the unspoken threat of renewed asset purchases by the Bank of England. The minutes of a single MPC meeting might not prove that a monetary policy corner has been turned but, for the moment, it certainly looks that way. If the UK data continue to show Britain’s economy pulling ahead of Euroland the euro could lose further ground. In the week ahead the key statistic will be the one on Thursday for second quarter UK gross domestic product. A punchy number would guarantee a boost for sterling/euro.