In global terms it was a mediocre week for the euro. It lost half a Japanese yen and three quarters of a US cent. That was despite a half-cent jump on Tuesday after investors seized upon the almost certainly erroneous idea that the European Central Bank is about to begin winding down its asset purchase scheme. Uninvestable banks’ lending less money is not at all what ECB monetary policy aims to achieve. So investors put two and two together and, bingo! The ECB must be preparing the way for an early end to the QE scheme! The euro jumped a cent higher against the US dollar.
The Euroland economic data were mostly alright but investors' focus was elsewhere. One factor was the growing expectation of a US interest rate increase in December. Another was the abject retreat of the British pound after the prime minister shed some light on when the wheels would officially be put in motion to leave the European Union.
Theresa May left the British public in no doubt as to what Brexit actually means last Saturday. Speaking at the Conservative conference in Birmingham, the PM assured the nation that she is ready to honour their decision to leave the EU. Brexit means Brexit and Article 50 – the two-year process for leaving the EU – will be triggered “no later than the end of March”.
Music to the ears of the 51.89% of the British electorate that voted to sever all ties with the bloc; less so for the pound which lost ground to the euro and US dollar, as investors reacted to the prospect of a ‘hard Brexit’. With Brexit now looming on the horizon, investors are acting on concerns that the UK could lose access to the European single market as part of plans to clamp down on immigration. For some reason it took markets by surprise and they set about giving the pound another good thrashing.
The pound was a firm believer in Murphy’s Law on Friday morning, after it tanked as much as 6% to a three-decade low against the US dollar, and slipped to its worst levels in five-years against the euro; adding to its earlier losses this week amid speculation that the UK economy is in line for increasing Brexit-fuelled uncertainty once Article 50 is triggered. But what was to blame for this latest dip in form? Well no one was entirely sure. Because there was no news so far to justify the pound's wild swing, analysts have suggested a “fat finger” error by a trader or computerised chain reaction could be responsible for the currency’s surprise downward trajectory.
At one stage in overnight trading, the pound was down by as much as 10% against the dollar, until a rogue outlying trade was cancelled, leading to a recovery. When the London markets opened, sterling had a small gust of wind in its sails and began to drag itself out of the doldrums.
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