Traders paid little attention to the latest missile test by North Korea on Friday, with shares and other risk assets barely moving, gold lower and focus rapidly returning to when and where interest rates will go up.
London, Frankfurt and Paris were a shade lower after Pyongyang fired a second missile in as many weeks over Japan, but the test had little effect on what was set to be the best week for European stocks since July.
The yen was also pushed lower to 110.7 per dollar in the currency markets, but that too was a continuation of trend.
The Japanese currency has seen its biggest fall this week in 10 months, while the dollar is headed for its biggest rise since April, thanks to a revival in US inflation data and bets the Federal Reserve could raise rates again this year.
“You have risk appetite returning in the markets more generally at the moment, so you have all these forces pushing down the yen,” said Vasileios Gkionakis, Global Head of FX strategy at UniCredit.
Britain’s pound was the other standout, hitting a 14-month high of $1.3430 a day after the Bank of England said it might raise interest rates for the first time in a decade in the “coming months”.
Sterling was also on course for its best week in over eight years on a trade-weighted basis and since November 2016 against the euro, which finally looks to have cooled following its surge this year.
“If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in the Bank Rate might be as early as in the coming months,” BoE member Gertjan Vlieghe said on Friday.
“If they don’t do it (hike rates) this time, their credibility will be lost completely for the next few years,” Unicredit’s Gkionakis said. Markets expect the BoE to move in November, he added.
Government bond yields slipped from the week’s highs as the geopolitical tensions drove investors back into a market they have been leaving all week. Safe-haven gold was also heading for its biggest weekly drop since July.
North Korea’s latest test missile flew over Japan’s northern island of Hokkaido before landing about 3,700 km (2,300 miles) into the Pacific Ocean, which would be far enough to reach the US Pacific territory of Guam.
Germany’s 10-year government bond yield, the benchmark for the region, inched down to 0.41 per cent, but was still flirting with its biggest weekly rise since late June.
US yields have also jumped. US Fed funds rate futures on Friday were pricing in a roughly 45 per cent chance the Fed will raise rates by December, versus around 25 per cent at the start of this week.
