Politics Whipsaws the Pound

Sterling recovers from multi-year lows as the UK moves a step closer to ruling out a no-deal Brexit, while US manufacturing gives cause for concern.

Previous Day's Market Highlights

Sterling was whipsawed by political developments on Tuesday, recovering from a 3-year low against the dollar after MPs took the first step towards legislating to rule out a no-deal Brexit. Lawmakers voted 328 to 301 in favour of taking control of today’s parliamentary agenda, allowing a bill to be brought forward which would mandate the Prime Minister to request an Article 50 extension should an exit, with or without a deal, not be approved by the Commons by 19th October. Opposition MPs won yesterday evening’s vote with the help of 21 rebel Conservative MPs, including two former Chancellors and Winston Churchill’s grandson, who will now have the whip removed and be barred from standing as Conservatives at the next general election. Speaking of elections, PM Johnson confirmed yesterday what had already been widely reported; that he would call for a vote on holding a general election if forced to extend the Brexit deadline. This glut of headlines resulted in volatile trading for the pound. Sterling came under pressure in the European session, falling to its lowest levels against the dollar since the October 2016 ‘flash crash’, below the $1.20 handle. However, after yesterday evening’s vote, the pound recovered all of its earlier losses, gaining around 0.25% against both the dollar and euro. 
Across the pond, recession fears once again came to the fore, this time after manufacturing PMI slid into contraction. August’s ISM activity gauge slid to 49.1, well below expectations and the lowest level since January 2016, with production, orders and hiring all falling. This is a worrying sign for the US economy, with escalating US-China trade tensions and additional tariffs only likely to worsen the slowdown. The dollar, which had earlier approached multi-year highs against a basket of peers, reversed course, shedding 0.3% after the release. Approximately 75% of all developed market manufacturing PMI surveys are now in contractionary territory, including Canada where August’s figure fell to a 3-month low of 49.1, dragging the loonie 0.2% lower over the course of the day.
Elsewhere, the euro recovered after hitting fresh two and a half year lows against the dollar, despite sources indicating that the ECB would be going for the ‘kitchen sink’ approach at next week’s policy meeting. Sources reported that policymakers would unveil a significant stimulus package next Thursday, including; a deposit rate cut, a tiering system to mitigate the impact of negative rates on the banking sector, strengthening forward guidance (by making a future rate increase contingent on data instead of a point in time) and the possible restart of asset purchases at a rate of 20-30bln EUR per month. The common currency’s lack of reaction to the reports shows that a significant degree of easing has already been priced in, making it difficult for Draghi & Co. to ‘out-dove’ the market next Thursday.
In other markets, European equities lost ground, with major indices dragged lower by weakness in the retail sector. The pan-continental Stoxx 600 closed 0.2% lower. US equity markets also lost ground, dragged down by disappointing manufacturing PMI figures. The benchmark S&P 500 closed 0.7% lower. Finally, oil prices also slid, with the disappointing manufacturing data sparking concerns over demand. Global benchmark Brent settled 0.7% lower, while US WTI crude settled more than 2% lower.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1045 1.1091 1.0724 3.31%
GBP/USD 1.2130 1.2310 1.1958 2.86%
EUR/USD 1.0980 1.1228 1.0926 2.69%
GBP/AUD 1.7905 1.8336 1.7690 3.52%
GBP/NZD 1.9155 1.9413 1.8547 4.46%
GBP/CAD 1.6165 1.6357 1.5865 3.01%

Today's Market Highlights

Politics is once again set to dominate today, with the day ahead shaping up to be another momentous day in Parliament. While developments on the Brexit delay bill will be the main focus, there is first the small matter of PM Johnson’s first PMQs and Chancellor Javid’s spending review. The former will likely feature a barrage of questions to the Prime Minister on Brexit, while the latter is set to feature a host of spending announcements as the government gear up for a snap election. However, these two events are just the starter. The main course will be this afternoon’s main business, progress on legislation to delay Brexit and prevent a no-deal Brexit. As always, parliamentary timings are subject to change, but a vote on this legislation is likely to be held early this evening. Assuming the bill passes in the Commons, the government will then move a motion to request a vote on holding a general election. This is not guaranteed to pass, with the government requiring two-thirds of MPs to vote for an election, and opposition MPs reportedly refusing to do so until a no-deal Brexit has been ruled out. 
So yes, we’re now in a situation where Boris ‘I don’t want an election’ Johnson wants a poll, and Jeremy Corbyn, who has been wanting an election for two years, doesn’t want one. Anyone else confused? Expect the pound to remain volatile, with downside risks persisting as the political melodrama continues to play out. 
Barring political developments here in the UK, today’s economic calendar is busy, with monetary policy the main order of business. The main highlight will likely be this afternoon’s policy decision from the Bank of Canada (BoC), where rates should remain unchanged at 1.75%. However, a surprise rate cut is not out of the question, with the BoC having a track record for being difficult to call, posing a tail risk to the Canadian dollar. Despite rates likely being left on hold, policymakers will probably strike a more cautious tone, with downside risks facing the economy having become more pervasive as global trade tensions continue to ratchet up. 
Away from the BoC, Bank of England policymakers will take part in their quarterly Inflation Report testimony, with questioning likely to centre around the potential impact of a no-deal Brexit. Meanwhile, a slew of speakers are due from both the ECB and FOMC. In Europe, remarks from incoming ECB President Lagarde, and current ECB Chief Economist Lane, will be parsed for signs of further policy loosening on the horizon. From the FOMC, comments from Williams, Bullard, Bowman, Kashkari and Evans will be examined as markets continue to price in a significant degree of policy easing for the remainder of the year. The Fed are also set to release their Beige Book, providing anecdotal evidence of regional economic conditions. Investors will likely be on alert for any concerns over the economic outlook and increasing trade tensions.
On the data front, services PMI figures will be in focus from both the eurozone and UK. In the eurozone, final data for August is set to show the services sector continuing to underpin economic growth as manufacturing slows, with the PMI expected at 53.4. In the UK, services PMI is expected at 51.0 - a shade above the crucial 50.0 barrier between expansion and contraction - though the release will likely be ignored with political developments remaining front and centre. Today’s only other notable release will be July’s retail sales figures from the eurozone.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:00am EUR Final Services PMI (Aug) 53.4 53.4
9:00am EUR Final Composite PMI (Aug) 51.8 51.8
9:30am EUR Services PMI (Aug) 51.0 51.4
2:15pm GBP Bank of England Inflation Report Testimony
3:00pm CAD Bank of Canada Rate Decision 1.75% 1.75%
7:00pm USD Fed Releases Beige Book