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Publication date: 9 September 2011
Author: Mark Deans, Moneycorp

Relief rally for sterling on no QE

- ECB growth downgrade hurts euro
- US QE3 still a possibility

This morning’s tabloids make much of the latest World Economic Forum Global Competitiveness Report. The Daily Mail and The Sun gleefully point out that in the rankings for ‘quality of math[s] and science education’, “We’re worse than Albania” in 43rd position. True enough, but we’re better than Luxembourg (47th), Germany (48th) and the United States (51st). Perhaps the papers would have done better to focus on the altogether more alarming position of Britain in the ‘soundness of banks’ table. The UK is in 111th place, behind such paragons of financial virtue as Argentina (108th) and Greece (106th). But look on the bright side: the UK is equal first in the table for ‘malaria incidence’.

The WEF does not touch on the quality of economics education, perhaps because it doesn’t cover the arts. Anyway, the economy is not entirely in the hands of British-educated economists. One member of the Bank of England’s Monetary Policy Committee is American and at least one other is US-educated. They, together with the other seven members, decided yesterday to leave the Bank Rate unchanged for a 31st month. They also decided not to launch a second round of asset purchases. That failure went down well with investors, who had feared they might. The omission was worth more than a cent to the pound against the euro and against every dollar you can think of.

Sterling/euro received additional support after the European Central Bank also elected to stick with its 1.5% Refinancing Rate. It was not the unchanged rate that helped but the downgrade of internal ECB projections for Euroland economic growth and inflation. Investors listened to ECB President Trichet’s press conference hoping to hear clues that rates would rise no further, maybe even go down. Although he was continuing “to monitor very closely” the upward pressure on prices, investors decided that the lack of “vigilance” postponed any possible increase for at least another month or two.

In the States, presentations by the president and the Federal Reserve chairman did no particular damage to the US dollar. The president wants to spend $447 billion on a programme to boost jobs, but it is in the interests of the Republican house of representatives to block it, so there is no guarantee it will happen. The Fed chairman said the possibility of a third round of QE was still on the cards but there will be no decision until the next FOMC meeting in a fortnight’s time. Although it starts this morning slightly down on the day against the pound and the antipodeans, it is firmer against the yen, the euro and the franc.

With all the week’s major events now out of the way, financial markets today should be relatively restrained. The UK producer price index (factory gate prices and manufacturers’ costs) ought not to be controversial, likewise Canadian housing starts and US wholesale inventories. The only figures with any real potential to do mischief are those for Canadian employment. Have a good weekend.

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