General Election Looming

Sterling struggles as the UK lurches closer to a general election, but not before a parliamentary showdown over no-deal today.

Previous Day's Market Highlights

If you thought that September would get off to a slow, subdued start; think again, because British politics had other ideas. The UK lurched significantly closer to a general election on Monday, with various reports that the Government would be treating tomorrow's likely vote on legislation aimed at preventing no-deal as a confidence vote. Put simply, if the government were to lose a vote on the legislation, necessitating an extension to Article 50, an early election would be called. With the rebel MPs seemingly confident that they have the numbers for their legislation - which would legally require the Prime Minister to request a 3-month delay to Brexit if the Commons had not approved an exit (deal or no deal) by 19th October - to pass, the likelihood of a pre-Brexit plebiscite markedly increased. Such an election could take place as soon as 10th October, though government sources seem to indicate that a poll would be held in the week of 14th October. PM Johnson stopped short of announcing a poll on the steps of Downing Street, though clearly hinted at such an eventuality, stating that "there are no circumstances in which I will ask Brussels for a delay", while simultaneously claiming that he doesn't want an election. Clearly, an early poll would be preferable to a Brexit delay to those inside Downing Street. The pound was, of course, pressured by the escalating uncertainty, in addition to manufacturing PMI tumbling to a 7-year low in August. Sterling fell to 3-week lows against the dollar, shedding 0.65% over the course of the day. Against the euro, sterling was also weaker, losing 0.3% to trade at 1-week lows. 

Elsewhere, the euro traded broadly weaker, with soft manufacturing PMI figures weighing on the common currency. August's final PMI data was released in line with expectations, at 47.0, confirming an 8th straight monthly contraction in the sector. The common currency settled 0.2% lower, briefly touching fresh 2 and a half year lows against the dollar, with concerns over the political situation in Italy also exerting pressure. In contrast, and much to President Trump's consternation, the dollar continued its march higher, chalking up a 4th consecutive daily gain against a basket of peers. The dollar index closed 0.25% higher, having earlier reached its highest levels since May 2017. Other majors were largely confined to their recent trading ranges, with volumes and liquidity thin owing to the Labour Day holiday in the USA and Canada. 

Overnight, the Reserve Bank of Australia (RBA) have, as expected, kept interest rates on hold at a record low of 1.00%. The RBA also maintained their easing bias, stating that policy will be eased further 'if needed', while also repeating that it is reasonable to expect low rates for an 'extended period'. The Aussie dollar was unmoved by the policy decision, with a 25bps rate cut in Q4 remaining likely.

In other markets, European equities rallied, with financial stocks leading the way as the pan-continental Stoxx 600 closed 0.3% higher. London's FTSE 100 was the continent's major mover, closing more than 1% higher as sterling tumbled. US equity and bond markets were closed in observance of Labour day. Finally, oil prices lost ground as concerns over demand resurfaced. In thin trading conditions, global benchmark Brent lost 1%, while US WTI crude shed 0.6%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.0960 1.1091 1.0724 3.31%
GBP/USD 1.1985 1.2310 1.1970 2.76%
EUR/USD 1.0940 1.1228 1.0930 2.65%
GBP/AUD 1.7835 1.8336 1.7690 3.52%
GBP/NZD 1.9050 1.9413 1.8547 4.46%
GBP/CAD 1.5990 1.6357 1.5865 3.01%

Today's Market Highlights

All eyes will once again be on Westminster today, with MPs returning from recess to begin a Parliamentary showdown over Brexit; including potential votes on legislation to rule out a no-deal Brexit as well as the possible triggering of a general election. MPs will today request an emergency debate on Brexit, essentially an application to allocate themselves Parliamentary time to legislate against no-deal, which, providing Speaker Bercow agrees, will be put to a vote in the Commons. Should the vote pass, MPs will, on Wednesday, debate and vote on legislation mandating an extension of the Article 50 period. However, we may not get that far before an early election is called, with the government likely to table a motion to trigger a general election, which would require a two-thirds majority to pass, should they be defeated tomorrow. While the situation remains fluid, sterling traders will remain glued to any developing headlines, with downward pressure on the pound the likely result of the ongoing uncertainties.

Elsewhere, a number of economic releases are due, with North America playing catch-up after yesterday's public holidays. Manufacturing PMIs are due from both Canada and the US, likely to show activity in the industry remaining subdued. In the US, the ISM activity gauge is expected to fall to 51.0, which would be the lowest level since the US' mini industrial recession in mid-2016. Meanwhile, north of the border, Canadian manufacturing PMI should hover close to the 50.0 break-even mark, the defining line between expansion and contraction. Tuesday's other data releases are of little importance, with the UK's construction PMI figures set to be ignored in the face of ongoing political uncertainties, and eurozone producer price inflation likely to tell markets what they already know, that price pressures remain extremely limited across the bloc.

Finally, a couple of central bank speakers are due. This morning, markets will be on alert from remarks from incoming ECB President Lagarde, especially after dovish-sounding comments last week. Today's only other speaker is Boston Fed President Rosengren, who will likely continue to display a hawkish view, having dissented and voted against a rate cut at the July FOMC.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Construction PMI (Aug) 45.9 45.3
10:00am EUR PPI (YoY - Jul) 0.2% 0.7%
2:30pm CAD Manufacturing PMI (Aug) 50.2
3:00pm USD ISM Manufacturing PMI (Aug) 51.0 51.2