An absence of better theory

Sterling fought it out with the Northern Scandinavian crowns to avoid last place on Friday. The GBP and NOK ended with a narrow advantage over the SEK, both of them down by an average of 0.2% against the major currencies. For the first time in a week the Japanese yen found itself in the lead.

In the absence of any better theory, the price action of sterling – lower on Friday and recovering this morning – suggests that it was driven as much by politics as by any other factor. The resignation of one Health Secretary and the swift appointment of another led to its recovery.

The only other sterling-specific event was the publication of the Bank of England’s Quarterly Bulletin. The bulletin drew attention to the effects of Covid lockdowns on different groups of people; those working from home built up savings, and others, unable to work, became increasingly indebted.

Transitory or not?

Data released on Friday showed US inflation rising to 3.9% in May. Separate from the consumer price index, the BEA’s personal income and spending numbers are the ones which the Federal Reserve supposedly uses to monitor inflation. The figures on Friday seemed to indicate that price rises are running out of steam.

The US dollar lost ground following the BEA report and continued to do so for the next hour and a half. Then, inexplicably, it staged a strong recovery. That rebound coincided with the University of Michigan’s closely-watched index of consumer sentiment, which came in at a finalised 85.5. It was a lower reading than expected; investors' had been looking for 86.5. So the dollar’s bounce could have been the result of somebody placing a conspicuous order in a quiet Friday afternoon market.

While the BEA data were interpreted by some as a sign that inflation could be topping out, others have different ideas. The Bank of America “expects U.S. inflation to remain elevated for two to four years”. Former Treasury Secretary Larry Summers thinks it will still be “pretty close” to 5% at the end of this year. The US dollar took little notice of the debate; it was on average unchanged on the day.

Tomorrow

Although a goodly supply of economic data lies ahead this week, the tap is not turned on until tomorrow. Today’s agenda is very sparsely populated and most of it is already done and dusted.

Norwegian retail sales increased by 5.8% in May and were up by 5.6% from the same month last year. The two biggest contributors were tech equipment and cultural/recreational goods. German import prices were up by an annual 11.8% while export prices rose by a more modest 4.2%. The rise in import prices was the biggest since 1981, with a doubling of energy prices mostly to blame.

All that remains today are the Dallas Fed’s manufacturing index and a speech by Federal Reserve Governor Randy Quarles. Figures from Japan tonight cover employment and retail sales.