RENEWED BANK OF ENGLAND QE NOW LESS LIKELY
A two and a half cent decline for sterling on Tuesday was rectified by the end of the following day. It was a different story on Thursday morning when the pound dropped the same two and a half cents and stayed down. The pound's low came just before London opened this morning, completing a five-cent range for the week.
- Better than expected UK purchasing managers' indices reduce the pressure for more easing
- RBA delivers a surprise interest rate increase
There was plenty to keep investors focused on sterling. Most notable were the purchasing managers' indices (PMIs) for the manufacturing, construction and services sectors. October's manufacturing PMI, printed on Monday, was the first positive surprise. Having been expected to be flat or slightly down on the month it in fact came in a point and a half higher at 54.9. Wednesday's services PMI was not quite so impressive, half a point higher at 53.2, but it, too, exceeded market expectations. The fly in the ointment was a two-point fall for the construction PMI, which temporarily took the shine off sterling on Tuesday.
Those figures, together with an equally surprising 1.8% monthly rise for the Halifax house price index, set the scene for a predictable verdict when the Monetary Policy Committee came to its decision on Thursday. There was no chance of a change to interest rates but there had been a long-odds possibility that the committee might go for another round of quantitative easing (QE). In the event, the previous week's punchy figure for third quarter growth, together with last week's positive PMIs and above-target inflation, made it difficult to argue convincingly for a more relaxed monetary policy.
The Aussie dollar's first boost came with Tuesday's UK construction PMI. Although it is not normally a market-moving figure, circumstances were slightly different this time. Monday's strong manufacturing PMI had led investors to expect a similarly bullish construction number. When they did not get one they sold the pound.
The second leg-up for the Aussie was entirely home-spun. Two weeks ago the official Australian figures showed inflation falling from 3.1% to 2.7% instead of the predicted 2.9%. Most economists believed the lower figure would remove the need for the Reserve Bank of Australia to adjust its Cash Rate this month. It obviously didn't: The RBA raised its policy interest rate from 4.5% to 4.75%, sending the Aussie a cent higher against the US dollar and an immediate cent and a half up against the pound. In its statement the RBA "assumes some tightening in monetary policy", presumably beyond current levels.
Although it had nothing to do with sterling, the other highlight of the AUD's week came when it broke through US$1 on the way higher. After flirting with "parity" with the USD the Australian dollar went for the big push on Thursday morning. It has spent the time between then and now digging-in in its new position.
Wednesday's publication of the Bank of England's Quarterly Inflation Report will be the highlight for sterling. If the Bank ups its inflation forecast, which it might well do with a VAT increase less than two months away, it could finally put to bed the idea of renewed QE for Britain and set the scene for higher interest rates next year. Earlier in the day, Australia's employment change is expected to less than half as strong as last month's 49.5k increase.