Heading for No-Deal?

Sterling sinks as hardened rhetoric from both Tory leadership contenders increases the chances of a no-deal Brexit ahead of today’s inflation releases.

Previous Day's Market Highlights

Sterling experienced a tumultuous trading day on Tuesday, sinking to fresh 27-month lows against the dollar, and 6 month lows against the euro, as concerns over a potential no-deal Brexit once again increased. Markets have been rattled by comments from both Conservative Party leadership contenders over the past 24 hours, namely both candidates describing the Irish backstop as 'dead' - severely denting the chances of UK-EU negotiations yielding a successful outcome. The chances of a disorderly exit have therefore markedly increased, though Parliament will likely try to block such an eventuality. The ability to do so remains in doubt however, with continued reports of plans to suspend Parliament to force through a no-deal outcome resulting in a further bout of sterling selling. Even better than expected labour market data couldn't stem sterling's decline. showing the market continuing to focus on political developments as economic fundamentals take a back seat. The labour market in the UK remains tight, with unemployment remaining at a 45-year low and wages (ex bonuses) increasing at their fastest pace since July 2008. Over the course of the day, sterling shed 0.9% against the dollar, reaching a low of $1.2398, but closing just above the $1.24 handle. Against the euro, the pound lost 0.4%, reaching its lowest levels since January €1.1052. 

Elsewhere, the dollar rose to the top of the G10 FX leaderboard, gaining 0.5%, after better than expected retail sales figures saw market participants reduce their bets on a prolonged cycle of monetary policy easing. Data showed headline retail sales increasing by 0.4% in June, the 4th consecutive monthly increase. Furthermore, the typically less-volatile excluding autos and control group measures also surprised to the upside, with MoM increases of 0.4% and 0.7% respectively. The data shows the US consumer remaining resilient despite ongoing economic uncertainties, with consumer spending set to continue underpinning US GDP growth in the coming quarters. A couple of Fed speakers also made notable remarks, distancing themselves from a significant loosening of policy. Chair Powell reiterated his recent 'act as appropriate' stance, while voting member Evans stated that 50bps of accommodation will likely be needed. This stance is in line with my base case of 25bps rate cuts in July and September, after which the outlook depends largely on President Trump's next move on trade. 

Meanwhile, the euro spent much of Tuesday on the back foot, due to both a strengthening dollar and weaker than expected sentiment surveys. Data from the ZEW institute showed continued pessimism amongst both German and euro-area businesses, the latter falling to a year-to-date low, cementing the case for additional ECB stimulus later this year. The common currency closed around 0.45% lower against the dollar. All other majors largely followed suit, with most of G10 FX shedding around 0.3% against the greenback. 

In other markets, European equity markets rallied, with construction stocks leading the way as the Stoxx 600 closed 0.5% higher. Across the pond, the US benchmark S&P 500 pulled back from yesterday's record high. The index closed 0.35% lower after President Trump's comments that there is a 'long way to go' on a China trade deal. Finally, oil prices slid as supply concerns eased on signs of thawing US-Iran relations. Both global benchmark brent and US WTI crude settled more than 3% lower.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1060 1.1270 1.1052 1.93%
GBP/USD 1.2390 1.2784 1.2382 3.14%
EUR/USD 1.1205 1.1412 1.1193 1.92%
GBP/AUD 1.7685 1.8422 1.7630 4.30%
GBP/NZD 1.8475 1.9345 1.8464 4.55%
GBP/CAD 1.6190 1.6857 1.6145 4.22%

Today's Market Highlights

Today is all about inflation, with CPI releases due from the UK, eurozone and Canada. From the UK, CPI is expected to have increased at 2.0% on a year-on-year basis in June, in line with the Bank of England's target and unchanged from May's release. Of more interest to policymakers, and market participants attempting to gauge the extent of inflationary pressures in the UK, will be the core CPI figure - expected to tick up by 0.1% to 1.8% on a year-on-year basis. Nonetheless, with policymakers' hands remaining tied by Brexit-related uncertainties, the release will likely have a muted impact on both sterling and the BoE's policy outlook, which should see rates kept on hold for the remainder of 2019, barring the shock of a no-deal Brexit. 

Meanwhile, from the eurozone, final CPI figures for June are expected to remain unchanged from the previously released flash estimate. Thus, headline CPI is expected at 1.2% YoY, with the core measure (which excludes the volatile effects of food and energy prices) set to increase at 1.1% YoY. While the uptick in inflation would be a positive sign for the ECB, and may briefly support the euro, policy stimulus remains highly likely with inflation significantly below target and economic momentum remaining weak. Today's final inflation release comes from Canada this afternoon, where headline CPI should moderate to 2% YoY in June, down from 2.4% in May. However, such a dip will be of little concern to the BoC and should see their upbeat tone maintained as the Canadian economy continues to perform well. This should see the loonie well supported in the coming months, especially as the Fed begin to ease policy. 

Today's only other notable releases are from the US, where investors will glance over June's housing starts and building permits releases. However, likely of more interest will be the release of the Fed's Beige Book, providing anecdotal evidence of regional economic conditions ahead of the July FOMC meeting in a couple of weeks' time. Central bank speakers are also relatively thin on the ground today, with just the ECB's Coeuré set to present remarks.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP CPI (YoY - Jun) 2.0% 2.0%
9:30am GBP Core CPI (YoY - Jun) 1.8% 1.7%
10:00am EUR Final CPI (YoY - Jun) 1.2% 1.2%
10:00am EUR Final Core CPI (YoY - Jun) 1.1% 1.1%
1:30pm USD Building Permits (MoM - Jun) 1.30mln 1.30mln
1:30pm USD Housing Starts (MoM - Jun) 1.26mln 1.27mln
1:30pm CAD CPI (YoY - Jun) 2.0% 2.4%