FOMC in Focus as Boris Heads to Berlin

The pound benefits from Merkel's Brexit comments ahead of this evening's key FOMC meeting minutes.

Previous Day's Market Highlights

While a glance at Tuesday's economic calendar would have left many, including myself, expecting another subdued trading day, a heavy amount of news flow more than made up for the lack of data releases. Headlines primarily centred around Brexit, with reaction to PM Johnson's letter laying out the UK's negotiating stance dominating the European session. As expected, the EU rejected the Prime Minister's desire to abolish the Irish backstop while also reaffirming that the Withdrawal Agreement would not be reopened; with EU Council President Tusk stating, much to the consternation of the British government, that those opposed to the backstop supported re-establishing a border on the island or Ireland. In contrast to Tusk, German Chancellor Merkel, who meets PM Johnson today, seemingly struck a more conciliatory tone. Merkel stated that leaders must think about "practical solutions" to the backstop issue, perhaps gently opening the door to an alternative. Sterling traders seized on Merkel's words, with the pound paring earlier losses and gaining a big figure across the board after the German leader's comments. However, sterling's rally was short-lived, with both clarification that Merkel would only be prepared to alter the non-binding Political Declaration and a reiteration of the Prime Minister's hardline rhetoric causing the pound to unwind its earlier gains and complete its rollercoaster ride. The pound ended the day 0.3% higher against the dollar, while closing settling 0.15% higher against the single currency.

Staying in Europe, the expected resignation of Italian PM Conte did little to impact the euro, which continued to strike a firm tone, adding a shade over 0.2%, with markets continuing to be buoyed by hopes of fiscal stimulus in Germany. On the other hand, the dollar sank to the bottom of the G10 FX leaderboard, weighed down by falling Treasury yields and nervousness ahead of this evening's FOMC meeting minutes. The greenback ended the day 0.2% lower against a basket of peers, recording its first daily loss in over a week. The softer dollar saw the antipodeans well-bid, with both the Aussie and Kiwi adding around 0.2%, despite risk sentiment remaining fragile. The Canadian dollar ended the day unchanged as the loonie failed to benefit from the modest rise in oil prices.

Away from FX, European equity markets closed in the red as concerns grew over a potential snap election in Italy. The pan-continental Stoxx 600 shed 0.6%, while Italy's FTSE MIB closed more than 1% lower. US equity markets also closed lower, the benchmark S&P 500 losing around 0.8%. Finally, oil prices rose after data showed a larger than expected inventory draw. Global benchmark Brent settled 0.5% higher, while US WTI crude gained 0.25%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.0930 1.1246 1.0724 4.64%
GBP/USD 1.2135 1.2517 1.2015 4.01%
EUR/USD 1.1095 1.1250 1.1026 1.99%
GBP/AUD 1.7910 1.8206 1.7560 3.55%
GBP/NZD 1.8965 1.9061 1.8278 4.11%
GBP/CAD 1.6160 1.6230 1.5865 2.25%

Today's Market Highlights

US monetary policy will be today's main focus, with this evening's release of minutes from the July FOMC meeting set to be scrutinised for signs of further easing; something that the market, and President Trump, are crying out for, but that the US economy doesn't seem to warrant. Nonetheless, after announcing a 25bps rate cut last month, the minutes will give clarity on whether FOMC members see the rate cut as just a "mid-cycle adjustment", or as the beginning of a prolonged easing cycle. While the rationale for July's cut will be under the microscope, any comments on US-China trade tensions will also attract significant attention, with the global economy seemingly the main determinant for future Fed policy shifts. Markets currently price around 75bps worth of rate cuts by year-end, hence a less-dovish than expected message poses an upside risk to the dollar, and downside risk to equity markets. Also worth bearing in mind, with the minutes being 3 weeks out of date, is Friday's scheduled speech from Fed Chair Powell at the Jackson Hole Symposium, where more explicit hints on future policy may be given.

Elsewhere, inflation figures from Canada will be eyed, as expectations of policy easing from the Bank of Canada (BoC) grow due to the slowing domestic economy. Despite weakening momentum, inflation is set to remain close to the BoC's target, with headline CPI set to have increased at 1.7% YoY in July and core CPI expected at 1.8% YoY - both readings showing modest inflationary pressures persisting. Softer than expected figures will likely result in the market increasing the chances of a September rate cut from the current 20%, weakening the Canadian dollar. Today's only other notable release will be US existing home sales figures, though these are of little importance ahead of the FOMC minutes.

Finally, another potential source of volatility stems from PM Johnson's meeting with German Chancellor Merkel today, which is likely to see Johnson repeat his message on abolishing the Irish backstop. Any headlines from the meeting will be closely watched, especially further small signs of compromise, with the pound seemingly priming itself for some good news should the two leaders make some progress towards common ground.

Today's Economic Calendar

Time Currency Release Consensus Previous
1:30pm CAD CPI (YoY - Jul) 1.7% 2.0%
1:30pm CAD Core CPI (YoY - Jul) 1.8% 1.8%
3:00pm USD Existing Home Sales (MoM - Jul) 5.39mln 5.27mln
7:00pm USD FOMC Meeting Minutes