Increasing Risks Keep Volatility Muted

FX markets remained confined to familiar ranges on Monday, with another quiet day ahead today.

Previous Day's Market Highlights

FX markets were subdued on Monday with a combination of ever-increasing global risks and a barren data calendar resulting in muted volatility. The day's only notable data release, July's final eurozone CPI figures, provided little in the way of surprises. Headline CPI was downwardly revised from the flash estimate, to 1% YoY, however core CPI remained unchanged at 0.9% YoY. The release tells market participants little that they didn't already know - with inflation remaining benign across the common currency bloc and the chances of significant ECB policy stimulus remaining high. Of more importance to the eurozone economy, and the broader global economy, are the increasing chances of fiscal stimulus in Germany, with the Government reportedly readying a stimulus package as a contingency for a 'deep recession'. While the fiscal stimulus genie appears to have been let out of the bottle, the efficacy of loosening the purse strings once already in a recession is questionable, with additional spending likely too little, too late in such a situation. Nonetheless, markets reacted positively to the increasing prospects of the ECB no longer being the only game in town, resulting in the common currency firming by around 0.1%. The chances of German fiscal stimulus helped markets to strike a more risk-on tone, with Treasury yields falling, especially at the long end of the curve, and the typical safe-havens of the Japanese yen and Swiss franc losing ground.

Meanwhile, the pound struck a slightly softer tone, dipping by 0.1% against both the euro and dollar, paring some of last week's advance, as the prospects of a no-deal Brexit remain elevated. There was little in the way of new information on the UK's departure from the EU on Monday, with PM Johnson's letter to EU leaders reiterating the UK's negotiating stance and repeating his desire for the Irish backstop to be ditched. However, the Prime Minister's schedule for the remainder of the week provides plenty of potential for volatility. The PM is set to meet German Chancellor Merkel on Wednesday, before meeting French President Macron on Thursday; with both meetings likely to see the PM reiterate his stance of leaving on 31st October 'no ifs or buts'. It remains to be seen whether EU leaders will soften their stance on reopening the Withdrawal Agreement.

Elsewhere, the dollar trod water against a basket of peers, with the market ignoring President Trump's ludicrous tweet urging the Fed to cut rates by 100bps and restart quantitative easing, despite describing the economy as "very strong". Overnight, minutes from the RBA's latest policy meeting provided little by way of surprises, with policymakers reiterating that further policy easing will be considered 'if needed'. The minutes were broadly as expected, with the RBA maintaining their easing bias, while monitoring global economic developments before acting further.

Away from FX, European equity markets were buoyed by the chances of looser purse strings in the EU's largest economy, with the pan-continental Stoxx 600 closing more than 1% higher. In the US, higher bond yields aided equity markets, with the benchmark S&P 500 gaining 1.2%. Finally, increased hopes of fiscal stimulus helped to support oil prices, with both global benchmark Brent and US WTI crude settling around 2% higher.

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 1.2110 1.2517 1.2015 4.01%
EUR/USD 1.1080 1.1250 1.1026 1.99%
GBP/AUD 1.7850 1.8206 1.7560 3.55%
GBP/NZD 1.8875 1.9061 1.8278 4.11%
GBP/CAD 1.6130 1.6229 1.5865 2.24%

Today's Market Highlights

Today is likely to be another quiet trading day, with no significant data releases due from any G10 economy. While markets may briefly glance over eurozone construction output figures, Canadian manufacturing shipments data and the fortnightly GDT dairy auction results, none have significant market moving potential.

Instead, market participants are likely to remain focused squarely on the growing risks facing the global economy, including the US-China trade war, Brexit, Italian political uncertainties and many more. The impact of such themes will likely be most evident in the fixed income market, with investors seeking a haven set to drive yields even lower, and have a spill-over effect on other asset classes - including equities and FX. As always with geopolitical themes, the situations can be fast moving and take unexpected turns, hence the market may be caught off guard by any breaking news.

Meanwhile, in the world of monetary policy, today sees just the one central bank speech, with Fed Governor Quarles due to make remarks on community development. The topic of the speech gives little cause to expect volatility in the aftermath of the remarks, with markets more focused on tomorrow's release of minutes from the FOMC's July meeting, in addition to Fed Chair Powell's Friday speech at the annual Jackson Hole Symposium.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Construction Output (MoM - Jun) -0.27%
1:30pm CAD Manufacturing Shipments (MoM - Jun) -1.7% -1.6%