Both the euro and the yen are higher this morning and we would suggest that is where the majority of the anti-dollar flow is going.
This is not to say that the travel ban may not have an effect economically in the near future such is the confusion about just who is subject to scrutiny, detention or deportation once they land in the United States.
For now however, and this is a strange feeling, the currency markets are dealing with things in a sanguine manner. That may change as US traders come in later in the day as it will be a mere skeleton operation in Asia for the next few sessions.
Sterling is also gaining on the USD ahead of Thursday’s Bank of England Inflation Report that will likely see the Governor revise both his inflation and growth forecasts higher but also countenance that the UK economy is on the horns of some wide and varied risks.
We would expect that for every mention of increased GDP and higher prices the Bank of England will be quick to remind people that firstly, Brexit has not begun and therefore the true economic cost cannot be known and that secondly, the main economic engine of UK growth between 2014 and 2016 – the UK consumer – is starting to show signs of exhaustion.
While we believe that inflation will drive higher in the coming months and overtake its 2% target probably by the end of the quarter, the chances of a hike in interest rates remains poor especially given the expansion of consumer credit and increases in mortgage spending in the past year. If the Bank of England wants to bring forward any decline in economic output, hiking the cost of the average household’s debt pile would be a great way to start.
Until the announcement we expect sterling to maintain its recent profile of support around current levels with risks to the downside from further Brexit negotiation revelations and just what amendments could be bolted on to the Article 50 bill due by the end of next month.
The data calendar is once again quiet today with political noises threatening to dominate proceedings this week once again.
Have a great day.