Receding Concerns Propel the Pound

Sterling rallies to 6-week highs while markets strike a risk-on tone, buoyed by improving US-China relations, hopes of fiscal stimulus, and the slimmer chances of a no-deal Brexit.

Previous Day's Market Highlights

The pound resumed its rally on Monday, as a fresh trading week began with a reduction in concerns over the UK potentially entering a technical recession and over a no-deal Brexit. July's monthly GDP data showed the economy growing at 0.3% MoM, above expectations, and beating the flat growth seen in June. Providing the pound with a further boost was the rolling 3-month average, a semi-reliable indicator for quarterly growth, showing the economy stagnating in the period of May - July, beating the contraction seen previously. While the headline figures were promising, and relieved one of the many pressure points facing the pound, the underlying data does flag some concerns. All of the growth seen in July was contributed by the services sector, with activity in both production and construction declining. This trend is set to continue, judging by recent PMI surveys, further evidencing the UK economy's dependence on a strong services sector to propel growth.
 
Meanwhile, staying in the UK, it was a busy day in the Westminster bubble on the final sitting day before a 5-week prorogation (suspension). Before MPs began any debate, the Queen gave Royal Assent to the 'Benn Bill' aimed at preventing a no-deal Brexit, while Commons Speaker John Bercow, the self-proclaimed 'Backbenchers' Backstop', announced he would be stepping down on the sooner of 31st October or at the next general election. Shortly after, the government maintained their Commons losing record, suffering their 5th.and 6th Parliamentary defeats in as many votes. Firstly, on a motion requiring aides' messages relating to prorogation to be released; secondly, with MPs once again voting against the holding of an early general election. Opposition MPs remain concerned that an election could be used to force through a no-deal Brexit, with Parliament's prorogation now meaning a general election cannot be held until 20th November, at the earliest. A plebiscite does however remain a question of when, rather than if, with the government holding a majority of -46 MPs. Meanwhile, across the Irish sea, PM Johnson's talks with Irish Taoiseach Varadkar yielded little in the way of a breakthrough on the Irish Backstop, with negotiations being described as 'constructive' by both parties. Over the course of the day, sterling rallied to 6-week highs against both the dollar and euro, gaining 0.75% and 0.5% respectively.

Elsewhere, the euro also gained ground, with the common currency well-supported after further reports that Germany may be considering fiscal stimulus if the economic outlook worsens. The single currency added 0.35%, with gains capped by apprehension ahead of the ECB's likely announcement of a sweeping stimulus package on Thursday. 

More broadly, markets struck a risk-on mood, with the antipodeans being the major beneficiaries from improved sentiment on US-China trade relations, Brexit, and hopes of fiscal stimulus. Comments from US Treasury Secretary Mnuchin that the two nations have a 'conceptual' trade enforcement agreement, as well as further US tax cuts being under consideration, were enough to send both the Aussie and Kiwi dollars 0.5% higher; the latter chalking up a 6th consecutive gain against its US counterpart. Speaking of the greenback, the dollar traded broadly weaker as a result of the improvement in risk appetite, losing 0.25% against a basket of peers.

In other markets, European equities lost ground in a quiet trading session, with the pan-continental Stoxx 600 closing 0.3% lower. Meanwhile, the US benchmark S&P 500 closed flat. Finally, commodity prices gained ground after the new Saudi Oil Minister committed to existing output cuts. Global benchmark Brent settled 1.7% higher, while US WTI crude gained 2.35%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1175 1.1230 1.0809 3.75%
GBP/USD 1.2345 1.2385 1.1958 3.45%
EUR/USD 1.1045 1.1164 1.0926 2.13%
GBP/AUD 1.8005 1.8336 1.7705 3.44%
GBP/NZD 1.9195 1.9413 1.8668 3.84%
GBP/CAD 1.6265 1.6357 1.5956 2.45%

Today's Market Highlights

For the first time in what feels like months, but is actually only 4 trading days, market participants will not need to revise Parliamentary procedure or listen to shouts of 'order, order!'; with the Commons now suspended until mid-October. However, political developments will not stray far from the investors' minds, with the small matter of Brexit negotiations set to continue throughout the next 5 weeks. Headlines, rumours and conjecture from these negotiations will continue to be the major driver of the pound in the near-term.
 
Turning to today, the primary data highlight will be this morning's UK labour market report, set to show the jobs market remaining tight and continuing to act as the UK economy's bright spot. Unemployment is expected to have held close to a 44-year low in July at 3.9%, while average earnings (inc. bonuses) are expected to have increased at 3.7%. Such a pace would be unchanged from the 3 months to June, but would still represent the fastest pace of wage increases since the financial crisis; evidencing how the tight labour market and increased competition for labour is resulting in increased compensation for British workers. Markets will also pay attention to both the claimant count change and claimant rate, useful leading indicators of potential softness to come in the months ahead. A release in line with expectations should see the pound continue to strike a relatively firm tone, though will not significantly change the BoE's policy outlook.
 
Elsewhere, no major data points are due from the eurozone, with the common currency set to continue trading in a relatively tentative manner ahead of Thursday's ECB policy decision. Meanwhile, across the pond, a couple of lower-tier releases are due, but will likely have little immediate market impact. From the US, JOLTS job openings should have remained close to a record high in July at 7.3mln, providing further evidence that the recent moderation in payrolls growth is due to supply constraints in the US labour market. From Canada, markets will examine August's housing starts and July's building permits data, though oil prices and the BoC's monetary policy stance remain the primary factors driving the loonie.
 
Finally, no speakers are due from any G10 central bank today, with both the ECB and FOMC now in their pre-meeting 'blackout' periods.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Unemployment Rate (Jul) 3.9% 3.9%
9:30am GBP Average Earnings - Inc. Bonus (3MoY - Jul) 3.7% 3.7%
1:15pm CAD Housing Starts (YoY Aug) 204.5k 222.0k
1:30pm CAD Building Permits (MoM Jul) 2.3% -3.7%
3:00pm USD JOLTS Job Openings (Jul) 7.3mln 7.348mln