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FX round-up: Pound jumps, JP Morgan sees "persistent" CPI overshoot

Sterling rode a wave of US dollar weakness higher to approach its best level since the Brexit referendum, despite a weaker than expected reading on British manufacturing.
At 2015 GMT, cable was trading higher by 0.58% to 1.35982, just below a 52-week high of 1.3657, according to Bloomberg data.

Earlier, IHS Markit's UK manufacturing sector Purchasing Managers' Index for December printed at 56.3, down from a reading of 58.2 for November, missing forecasts for 57.8.

However, by and large market commentary focused on the fact that the average PMI reading for the last three months of 2017 was still the best since the second quarter of 2014.

To take note of as well, it was another volatile day for longer-term Gilts on Tuesday, which underperformed other sovereign debt by a comfortable margin, helping to send the yield on the benchmark 10-year issue up by 10 basis points to 1.29%.

On a related note, strategists at JP Morgan told clients: "The main risk to our house view that real GDP growth will remain positive in 2018 (+1.6%) is the possibility of the Brexit talks breaking down. The main upside risk comes from the strengthening global backdrop. We expect a 50 bps tightening by the Bank of England in 2018 in the context of a sustained overshoot in CPI inflation."



Sterling also gained against the European single currency, rising 0.37% to 1.1282, although it remained below the top of sideways trading range in which it had been stuck since mid-June 2017.

Gains against the euro came despite remarks from European Central Bank governing council member Benoit Coeure to the effect that if inflation did not disappoint then an extension of the ECB's quantitative easing programme, in October 2017, was likely to be the last.

Speaking to Caixin Global, Coeure said: "We have flexibility to react both ways. Given what we see in the economy, I believe that there is a reasonable chance that the extension of our asset purchase programme decided in October can be the last."

Coeure added: "But the Governing Council of the ECB has also made it clear that the programme can be kept in place for longer, should inflation disappoint on the downside. And if inflation turned out to be higher than currently expected, we would have plenty of instruments with which to react."


In the background, the US dollar spot index was down by 0.41% to 91.86 - just off a 52-week low of 91.011 - as US Treasuries outperformed European sovereign debt throughout the better part of the session.

To take note of, towards the end of 2017 some strategists had called attention to the fact that US tax cuts were now largely in the rear-view mirror for markets and hence their impact on rates had already been priced-in to a large extent.

The greenback also gave back some ground against the Japanese yen, trading 0.34% lower to 112.28.