Inching Closer to a Deal..?

Sterling firms to its best levels in almost a month as market participants grow increasingly optimistic that the UK will avoid a no-deal Brexit. The dollar shrugs off upbeat consumer confidence data as recession concerns come to the fore once again. Today's calendar is devoid of major data releases, with focus set to remain on geopolitical developments.

Previous Day's Market Highlights

Are we inching ever closer to an amended Brexit deal? Markets seem to think so, with increasing optimism that the UK would avoid a no-deal Brexit pushing sterling to 1-month highs on Tuesday. Such optimism stems from a number of sources, including; reports of UK officials visiting Brussels for talks this week, opposition parties signing a joint statement agreeing to attempt to legislate against a no-deal exit and rumours that the EU may re-open the withdrawal agreement after apparent progress at the G7 summit. While sterling had trended higher all day, the latter headline resulted in a brief pop even higher, with the pound briefly trading above the $1.23 handle. Despite the market's optimism, it should be emphasised that, not only are we some way from a revised deal being agreed, there remains the small matter of passing such a deal through Parliament. No simple task. Nonetheless, the market was thinking in the short-term on Tuesday, resulting in the pound adding 0.6% against the dollar, and 0.7% against the euro. Only time will tell if such gains are maintained, and whether the reports come to fruition, with the situation remaining as fluid as ever.

Elsewhere, the dollar was dragged lower by falling Treasury yields, largely as a result of increased demand at the long end of the curve. The fall in yields resulted in the 2s10s spread inverting once again, at one point by as much as 4bps, sparking concern in some circles over a possible upcoming recession. The dollar largely ignored surprisingly upbeat consumer confidence figures, the index reading 135.1 in August, despite the significant impact that the consumer will have on economic growth and Fed policy in the coming months. The greenback ended the day 0.1% lower against a basket of peers. The euro also struggled, dipping 0.1% as markets continued to price in the announcement of an ECB stimulus package next month. Markets appear to be bracing themselves for a significant package of measures in a couple of weeks after ECB Vice President de Guindos flagged the ECB's need to 'act with determination' - signalling much looser policy on the horizon.

Commodity currencies also made little headway, largely due to risk sentiment remaining fragile as trade uncertainties persisted. The Kiwi dollar was Tuesday's worst performer, dipping 0.4%, while its Australian and Canadian counterparts both shed 0.2% - the latter not being able to take advantage of firmer oil prices. 

In other asset classes, European equities were aided by reports that China was considering relaxing restrictions on automobile imports, with the pan-continental Stoxx 600 closing 0.5% higher. In the US, markets were weighed down by the 2s10s inversion, with the benchmark S&P 500 closing 0.33% lower. Finally, oil prices firmed after the weekly private inventory survey showed a greater than expected stockpile drawdown. Global benchmark Brent settled 1.4% higher, while US WTI crude gained around 2.5%.

Turning to Monday, markets were volatile despite UK desks being closed for a bank holiday. Trade headlines continued to dominate price action, with markets striking a risk-on tone after President Trump stated that "anything is possible" when asked about delaying the imposition of tariffs on Chinese goods. Meanwhile, survey data continued to paint a bleak picture of the German economy, with the IFO business climate gauge, a well-respected indicator, falling to its lowest level in almost 7 years, before taking into account the most recent developments in the US-China trade war. Whether this is enough to bring about fiscal stimulus in Germany remains doubtful, with many senior officials expressing doubts about the necessity of such a programme.

Away from FX, equity markets were roiled on Friday by the escalation in trade tensions, resulting in the pan-European Stoxx 600 closing 0.6% lower, and the US benchmark S&P 500 shedding more than 2.5%. Risk sentiment reversed course on Monday however, spurred on by Trump's comments on China (above); the pan-European Stoxx 600 closed unchanged, while the US benchmark S&P 500 gained more than 1%. Meanwhile, Friday saw oil prices slide, also as a result of deteriorating US-China relations, with global benchmark Brent losing 1.5%, and US WTI crude settling 2.5% lower. Oil's slide continued on Monday, fuelled by concerns over oversupply, with both Brent and US WTI crude settling around 1% lower.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1065 1.1091 1.0724 3.31%
GBP/USD 1.2270 1.2310 1.2015 2.40%
EUR/USD 1.1090 1.1250 1.1051 1.77%
GBP/AUD 1.8210 1.8336 1.7690 3.52%
GBP/NZD 1.9365 1.9413 1.8547 4.46%
GBP/CAD 1.6325 1.6357 1.5865 3.01%

Today's Market Highlights

After a relatively volatile Tuesday, today's economic calendar points to a very, very quiet trading day ahead - unless President Trump decides to inject some excitement via his Twitter account. On the data front, no major releases are due from any G10 economy, with this morning's Swiss ZEW sentiment survey unlikely to result in significant volatility.

Taking into account the lack of economic releases, markets will continue to be driven by geopolitical events and shifts in risk sentiment. As mentioned last week, market participants continue to face an ever-growing 'wall of worry', including, but not limited to; increasing trade tensions, recession warning lights in the bond market flashing ever brighter and concerns over the effectiveness of central banks' limited monetary policy toolkits. Increasing concerns over any or all of the aforementioned will likely see a rotation into less risky assets, benefitting safe-haven currencies such as the Japanese yen and Swiss franc.

Finally, a couple of central bank speeches may attract some attention. Late in the North American session, markets will hear from non-voting FOMC members Barkin and Daly, potentially giving some insight on the committee's views on further policy easing. Overnight, remarks from BoJ Board Member Suzuki will be parsed for signs that the BoJ are considering further stimulus for the Japanese economy.

Today's Economic Calendar

Time Currency Release Consensus Previous
09:00 CHF ZEW Survey - Economic Expectations -24
17:20 USD Fed's Barkin Speech
22:30 USD Fed's Daly Speech