Speculation and statistics

Throughout this week, fluctuations in the currency exchange market have been driven more by speculation than any hard economic data. The pound dropped briefly against the euro following Boris Johnson’s controversial Brexit article in The Daily Telegraph and Mark Carney has spent more time on issuing warnings about the economic fallout of leaving the EU.

In contrast, the euroland inflation rate of 1.5% had little effect, nor did the release of ZEW’s measures of investor sentiment in Germany and the Eurozone. It could be that the market is waiting for the meeting of the European Central Bank’s Governing Council in just over a month’s time. There was speculation in the week that the ECB might announce an extension to the bank’s €60bn-a-month asset purchase programme. Until now, the assumption had been that the ECB would soon be winding down its quantitative easing programme but there was a counter narrative that the strength of the euro – up 14.5% against the US dollar this year could be used as a reason to extend the scheme. This caused a brief dip in the value of the euro but with that inflation rate of 1.5% close enough to its 2% target and a growing economy across the Eurozone, in the end the figures don’t suggest an extension to QE.

The dollar had a brief rally following the Federal Reserve’s monetary policy statement, confirming that the Federal Funds rate remained unchanged at 1%-1.25% and the central bank will begin the process of “balance sheet normalization” next month. The market had been expecting this news, which has been previously signalled as forthcoming by the Fed. From October it will allow progressively larger amounts of bonds to run off without replacing them. The effect will still be to reduce the number of dollars in circulation and is therefore theoretically positive for the currency. The US dollar strengthened by one and a quarter euro cents yesterday and rose by a quarter of a cent against sterling.

The end of the week sees all eyes turn to Florence as Theresa May is due to speak to European leaders at 2.15pm (GMT) on the matter of Brexit. At the UN assembly earlier this week she confirmed that she would be “setting out where we are and looking ahead at negotiations.” The speech will be followed by a visit to London next Tuesday from EU Council leader Donald Tusk. Whether the speech provides some concrete certainties for the market or sparks new rounds of speculation remains to be seen.

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