Fragile Sentiment Dampens Volatility

Risk sentiment remains fragile as geopolitical worries linger, while sterling is subdued as MPs continue to trade jibes, with US data in focus today

Previous Day's Market Highlights

Thursday's dreary London weather was largely a mirror image of yesterday's price action in the FX market; with volatility across most major pairings subdued throughout the day. Ongoing geopolitical risks, concerns over the health of the global economy,  and now the potential impeachment of President Trump have resulted in investors striking a more cautious tone, dampening volatility. Sterling remained tightly confined to its recent trading ranges, largely shrugging off another round of MPs trading jibes in Parliament, while also ignoring Prime Minister Johnson doubling-down on his Brexit stance; the PM once again repeating that 'we will simply come out' on 31st October to a meeting of backbench Tory MPs. Against the dollar, the pound settled 0.2% lower, with the key support at 1.2300 holding firm for now. Meanwhile, trading conditions were choppier against the euro, with the pound eventually managing to eke out a daily gain of 0.1%.

Across the pond, the dollar traded in a similarly choppy manner, with relatively firm economic data and positive comments on trade competing with ongoing concerns over the start of an impeachment inquiry to dominate the market. For those bullish on the dollar, unrevised 2nd quarter GDP data, showing growth at 2% on an annualised QoQ basis, as well as reports China are continuing to discuss a further round of trade talks with the US in October, acted as catalysts to buy the greenback. However, for those bearish, the release of a whistleblower complaint over Trump's call with the Ukrainian President gave cause for caution. Overall, neither the bulls or the bears won Thursday's tug of war, with the dollar settling largely flat against a basket of peers. Overnight, confirmation that the next round of US-China trade talks would be held on 10th October has helped to give the dollar, and risk sentiment more broadly, a shot in the arm.

Elsewhere, the euro dipped 0.1% against the dollar, briefly dipping to a fresh 28-month low at 1.0904, as reports that the US would be applying 7.5bln USD worth of tariffs on EU goods as part of a state subsidy dispute exerted pressure. Nonetheless, a host of chunky option expiries limited movement to a tight range, with 1.09 now the key level to watch. Thursday's best performer was the kiwi dollar, which gained 0.5% against its US counterpart after comments from RBNZ Governor Orr that the central bank is unlikely to need unconventional policy tools (such as QE) dialled back expectations of additional stimulus. 

Away from FX, European equity markets benefitted from trade optimism, with the pan-continental Stoxx 600 closing 0.65% higher. However, such gains were not mirrored across the pond, where the benchmark S&P 500 slid 0.25% as impeachment concerns weighed. Finally, oil prices were largely unchanged, as supply concerns continued to linger.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1295 1.1381 1.0930 3.96%
GBP/USD 1.2335 1.2583 1.1958 4.97%
EUR/USD 1.0920 1.1110 1.0904 1.85%
GBP/AUD 1.8240 1.8496 1.7792 3.81%
GBP/NZD 1.9585 2.0003 1.8996 5.03%
GBP/CAD 1.6365 1.6691 1.5956 4.40%

Today's Market Highlights

The trading week draws to a close with a busy economic calendar, as a host of US releases take centre stage. Firstly, market participants will examine this afternoon's core PCE release, with the price index being the Fed's preferred inflation gauge. August's  data is expected to show the index increasing at the fastest pace since February, at 1.8% YoY. This gives the FOMC a conundrum, with additional policy easing becoming increasingly difficult to justify with inflation beginning to heat up. Also in focus this afternoon will be August's durable goods orders, expected to decline by 1% MoM, with the data being a useful leading indicator for the health of the slowing manufacturing sector. Final consumer sentiment figures from the University of Michigan will also be eyed, though the data should remain unrevised from the preliminary estimate at 92.0, modestly below the 3-month average. Consumer sentiment, and spending, remain key for the US economy, with consumption largely propelling growth alone as business investment and cross-border trade volumes decline.

Elsewhere, political developments will continue to determine the near-term direction of the pound, with investors set to pay close attention to headlines stemming from today's talks between Brexit Secretary Barclay and EU Chief Negotiator Barnier. The talks may signal the two sides inching closer to a deal, however talk of discussion over a time-limited Irish backstop is likely to be a non-starter; with the EU having already rejected such an arrangement. Meanwhile, this morning's eurozone sentiment surveys are expected to show both businesses and consumers remaining pessimistic on the economic outlook, despite the ECB's sweeping stimulus package.

Central bank speakers will also be in focus as market participants continue to grapple with the likely policy outlooks for global central banks. From the FOMC, Board Member Quarles and hawkish non-voter Harker are due to make remarks; while ECB members de Guindos and Weidmann will also speak. With both central banks seemingly divided over the correct course of action, these comments will be closely watched.

Looking ahead to next week, October will begin with the usual round of PMI surveys, where market participants will look for signs that a slowdown in the global manufacturing is continuing, and perhaps beginning to spill-over into other sectors of the economy. Meanwhile, the RBA are set to announce a 25bps rate cut, while flash eurozone CPI figures will likely show the pace of price increases remaining benign. Finally, Friday sees the release of monthly US labour market data, with payrolls growth set to moderate further as supply constraints continue.

Today's Economic Calendar

Time Currency Release Consensus Previous
10.00am EUR Final Consumer Confidence (Sep) -6.8 -6.5
1.30pm USD Core PCE - Price Index (YoY - Aug) 1.8% 1.6%
1.30pm USD Durable Goods Orders (Aug) -1.0% 2.0%
3.00pm USD Final University of Michigan Consumer Sentiment (Aug) 92.0 92.0