Facing a Mounting Wall of Worry

Sterling firms into the weekend despite market participants remaining nervous as global uncertainties continue to mount.

Previous Day's Market Highlights

What a tumultuous couple of weeks it has been for markets whilst I've been out of the office - so much for a quiet August! While the UK's divorce from the EU continues to rumble on, with little in the way of concrete progress having been made, market participants are facing an ever-growing 'wall of worry'; including aggressive monetary policy easing, increasing trade tensions, global political uncertainties, and recession warning lights in the bond market flashing brighter and brighter. The latter culminating last week with the spread between 2-year and 10-year US Treasuries, a typically reliable recession indicator, inverting for the first time since 2007. In the FX market, these uncertainties have resulted in demand for the typical safe-havens of the Japanese yen and Swiss franc, while the antipodeans (AUD & NZD) lag behind the pack, the latter weighed down by an unexpected 50bps rate cut from the RBNZ. Markets may be on the verge of entering a self-perpetuating cycle of concern; with participants seeking a safe-haven sparking further demand for bonds, driving yields lower thus sparking further fear and even greater inflows into fixed income. This should see the JPY and CHF remain well-bid, while providing a headwind to more risk-sensitive currencies.
Turning to Friday in a little more depth, the pound was the day's best performer, with support seemingly stemming from an unlikely source; the prospects of a Corbyn-led government. Various reports of a caretaker government, led by the Labour leader to avert a no-deal Brexit, have gathered pace over the latter part of the week, though such a plan appears to be facing stiff Parliamentary opposition. Nonetheless, the reports continue to show the pound trading as a 'Brexit Barometer', with the market paring back some of the extreme concerns over a no-deal Brexit seen recently. The pound ended Friday 0.4% higher against the dollar, reaching a 1-week high, while the pound also added 0.6% against the euro, closing above the €1.09 handle for the first time since early-August.
Elsewhere, the dollar chalked up a 4th consecutive gain against a basket of peers, adding 0.1% despite the greenback paring some of its earlier advance after disappointing consumer sentiment figures. The University of Michigan's gauge, the most widely-watched indicator, fell significantly short of expectations in August, falling to 92.1, the lowest level since January. Such a steep fall is a concern for the US economy, with the leading indicator emphasising how fears over a recession -- sparked by ongoing US-China trade tensions and the Fed's recent interest rate cut -- may be beginning to weigh on the US consumer. In contrast to the buck, the euro struggled on Friday as market participants continued to price in the announcement of a significant policy stimulus package in September, sparked by dovish comments from ECB policymaker Olli Rehn that Draghi & Co. should announce a "significant and impactful policy package" next month. The single currency settled 0.2% lower, closing below the $1.11 handle for the first time in a fortnight. Most other majors were rangebound on Friday, though the Canadian dollar managed to add a shade under 0.4% as oil prices firmed.

In other asset classes, equity markets on both sides of the Atlantic ended a volatile week with solid gains. In Europe, the pan-continental Stoxx 600 added 1.25%, while the US benchmark S&P 500 gained 1.4% as Treasury yields rebounded modestly. Finally, oil prices firmed into the weekend, despite OPEC forecasting weaker demand for the remainder of the year. Global benchmark Brent settled 0.8% higher, while US WTI crude gained 0.7%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.0965 1.1246 1.0724 4.64%
GBP/USD 1.2165 1.2517 1.2015 4.01%
EUR/USD 1.1095 1.1250 1.1026 1.99%
GBP/AUD 1.7935 1.8206 1.7560 3.55%
GBP/NZD 1.8935 1.9061 1.8278 4.11%
GBP/CAD 1.6140 1.6229 1.5865 2.24%

Today's Market Highlights

The week begins with a relatively barren economic calendar, with a couple of eurozone releases the only highlights. While market participants may glance over this morning's current account figures, the main centre of attention will be the release of final CPI data for July. The figures should show both headline and core inflation remaining sluggish, with the readings expected at 1.1% and 0.9% YoY respectively. Such a pace of price increases would be unchanged from the previously released flash estimate, though would further heighten the chances of a significant ECB policy stimulus package being delivered in September. Today's calendar is otherwise devoid of major releases from any other G10 economy, though the overnight release of minutes from the Reserve Bank of Australia's (RBA) latest policy meeting will be closely examined for signs of further policy easing later this year, with markets currently pricing in a further 45bps of cuts over the remainder of 2019.
Monetary policy will remain in focus throughout the remainder of the week, with market participants continuing to aggressively price in policy easing around the globe. Minutes from the FOMC's (Weds) and ECB's (Thurs) July policy decisions will be watched for any hints of the future interest rate path, especially with markets expecting the latter to announce a significant policy stimulus package next month. The Kansas Fed's annual monetary policy symposium in Jackson Hole will also be on the radar in the latter part of the week, especially Friday's planned speech from Fed Chair Powell, along with a host of other central bankers making remarks. The symposium is rather topically titled 'Challenges for Monetary Policy' hence has significant market-moving potential.
Meanwhile, with a busy week for monetary policy, along with ongoing geopolitical issues in the shape of US-China trade, Brexit and Italian political uncertainties, economic data is likely to take a back seat over the coming days. In fact, the calendar is relatively light, with no major releases due from either the UK or US. Highlighting the calendar will be August's flash eurozone PMIs, expected to show economic momentum remaining weak, particularly in the manufacturing sector. Meanwhile, CPI inflation from Canada is this week's only other major release.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Final CPI (YoY - Jul) 1.1% 1.1%
10:00am EUR Final Core CPI (YoY - Jul) 0.9% 0.9%
2:30am (Tues) AUD RBA Meeting Minutes