What a surprise

Investors made a wonderful pretence at astonishment on Wednesday evening when the Federal Reserve chairman said what everybody had pretty much expected him to say: the FOMC is now talking about talking about tightening monetary policy. The US dollar wiped the floor with the other major currencies following his comments.

It was not that the FOMC made any change to monetary policy yesterday. It will “continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month” until further notice. So no tapering yet. However, the “dot plot” of members’ expectations for interest rates showed seven of them anticipating an increase next year and a majority looking for a higher federal funds rate in 2023. Officially, inflation is still “transitory” but there was at least a nod to the possibility that it might become entrenched.

The dollar jumped at least half a cent when the dot plot appeared and, in most cases, gained further ground during the evening. It is an average of 0.9% firmer against the major currencies with gains of nearly one cent against sterling and a cent and a quarter against the euro. GBP/USD touched a six-week low overnight.

Nothing else to see

The rest of Wednesday’s data and events paled into insignificance. A ten-year high for Canadian inflation, a jump in NZ GDP and a two-year low for Australian unemployment all struggled to attract attention.

Canada’s consumer price index rose 3.6% in the year to April, the largest increase since May 2011. Although there was some impact from the base-effect of low prices a year earlier, the main upward pressure on prices came from housing and motor cars. Investors did not care, and they took even less interest in an unexpected 0.4% monthly rise in Canadian wholesale sales.

They also failed to get excited by news that New Zealand’s economy had expanded by 1.6% in the first quarter of the year, three times the expected growth. The NZD is hardly changed on the day against the AUD and GBP. Similarly with the Australian employment data, 115k new jobs – most of them full-time – and a fall in the rate of unemployment to 5.1% brought no great joy to the Australian dollar.

The weekend awaits

In what promises to be a gentle wind-down to the weekend, the only obvious event risk for sterling is Friday’s UK retail sales data for May. There are monetary policy decisions from the Swiss National Bank this morning and the Bank of Japan tonight; it would be a surprise to see any change from either.

Today’s ecostats begin with Eurozone inflation, estimated at 2%, and move on through US jobless claims to the Philadelphia Fed’s manufacturing index. Friday’s brief agenda includes Japanese inflation, German producer prices and Canadian new house prices.

Friday’s UK retail sales data will show double-digit annual growth, exaggerated by the closure of unnecessary shops in May last year. The forecast 29% year-on-year rise will look more impressive than the expected 1.6% monthly increase.