Risk of No-Deal Falls Further

Sterling rallies as MPs pass a bill preventing a no-deal Brexit, while the BoC leave rates on hold, and US data comes into view today.

Previous Day's Market Highlights

Sterling climbed by more than 1% on Wednesday as concerns over a no-deal Brexit on 31st October receded after MPs passed legislation to block such an outcome. Lawmakers in the Commons passed a bill, by 327 votes to 299, requiring the Prime Minister to request an Article 50 extension if no deal has been agreed by 19th October. Interestingly, the legislation passed with an amendment requesting a 4th (yes, 4th) vote on Theresa May’s original deal. Luckily for anyone feeling a sense of déjà vu, the amendment seems to have little legal clout and a vote unlikely to take place. The Bill’s passage came much to the consternation of PM Johnson, who immediately tabled a motion calling for an early general election. However, the government were also defeated on this motion – marking 4 defeats in 4 votes for the Prime Minister – with opposition MPs concerned that an election, and the resulting suspension of Parliament, could be used to force through a no-deal Brexit. The end result of Wednesday’s political shenanigans is that the UK has moved further away from no-deal, but moved even closer to a general election. The latter seemingly being a question of when, rather than if, a plebiscite will be held. This resulted in solid gains for the pound, which added 1.1% against the dollar, and 0.55% against the euro, with sterling benefitting from the perceived lower risk of a cliff-edge Brexit.
 
Elsewhere, the Canadian dollar gained ground after the Bank of Canada (BoC) left rates on hold, with policymakers giving little sign they were planning to join the global cycle of monetary policy easing. The BoC affirmed that the “current degree of monetary policy stimulus remains appropriate” - resulting in the chances of an October rate cut receding, and the loonie gaining more than 0.8%. Meanwhile, the dollar struggled as markets struck a risk-on tone, aided by the the withdrawal of Hong Kong’s controversial extradition bill. The greenback was 0.6% lower against a basket of peers at the close. The improvement in risk sentiment provided a shot in the arm for both the Aussie and Kiwi dollars, while also seeing Treasury yields fall across the curve as demand for safe-havens diminished. The yen also struggled as a result of increasing risk appetite. The risk-on mood was further boosted overnight after reports that the US and China agreed to hold a further round of trade talks in October.
 
The dollar’s weakness allowed the euro to take advantage, with the common currency adding 0.5% over the course of the day. The euro’s ascent was aided by better than expected services PMI figures, the index printing 53.5 in August, evidencing how the services sector continues to underpin the weak eurozone economic expansion. The euro shrugged off dovish comments from a couple of ECB policymakers, with incoming ECB President Lagarde seemingly confirming she would stick to the status quo, indicating that the current highly accommodative policy stance will be warranted for a prolonged period.
 
Away from FX, European equities closed in the green, buoyed by the headlines from Hong Kong in addition to hopes that a no-deal Brexit would be averted. The pan-continental Stoxx 600 closed 0.85% higher, while London’s FTSE 100 added 0.6%. US equities also gained ground, the benchmark S&P 500 closing 1.1% higher. Finally, oil prices rallied after upbeat economic data from China and an uptick in risk appetite. Global benchmark Brent jumped 4.1%, while US WTI crude settled 4.3% higher.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1085 1.1109 1.0724 3.31%
GBP/USD 1.2215 1.2310 1.1958 2.86%
EUR/USD 1.1020 1.1228 1.0926 2.69%
GBP/AUD 1.7940 1.8336 1.7705 3.44%
GBP/NZD 1.9155 1.9413 1.8668 3.84%
GBP/CAD 1.6140 1.6357 1.5956 2.45%

Today's Market Highlights

Focus for the pound will once again be on the Westminster bubble today, with political developments to remain the pound’s main driver. Today’s Commons agenda contains little of interest for financial markets, with focus instead on the House of Lords as the Bill to prevent a no-deal Brexit continues to progress through Parliament. Market participants will also remain glued to the news wires, with a general election still a matter of when, rather than if, with the Conservatives no longer holding a working Parliamentary majority. More broadly, markets will be attempting to work out what the government plan to do next, with plans A, B and C (prorogation, expulsion of MPs, and calling an election) having all failed. PM Johnson is due to speak this afternoon, with various reports circulating that the Conservatives are treating today as the effective first day of an election campaign.
For the pound, further moves to rule out a no-deal Brexit, including passage of the Bill through the Lords, would likely result in further upside. However, uncertainties stemming from a potential general election should keep a lid on any rallies for now.
 
Turning away from political developments in the UK, today’s economic calendar contains few highlights. The most notable release will be this afternoon’s US ISM non-manufacturing PMI, expected to show the services sector continuing to expand at a solid rate. The index, referencing August, is expected at 53.9, representing a modest uptick from July’s figure of 53.7. An upbeat release may allay some fears of a US recession, while also evidencing how the services sector continues to underpin the economic expansion. Today’s only other notable release will be weekly jobless claims from the US, expected broadly in line with the 4-week average of 215k. No notable releases are due from the eurozone or UK, or from any other G10 currency throughout the European or American sessions.
 
Bearing in mind the lack of releases, comments from a number of central bank speakers may have an outsize market impact. Investors will hear remarks from ECB Vice President de Guindos, BoE MPC Member Tenreyro and BoC Deputy Governor Schembri throughout the day. The latter’s remarks will likely have the most impact, with Schembri set to deliver the BoC’s economic progress report, likely providing an insight into future monetary policy decisions.

Today's Economic Calendar

Time Currency Release Consensus Previous
1:30pm USD Weekly Jobless Claims (Aug 30) 215k 215k
3:00pm USD ISM Non-Manufacturing PMI (Aug) 53.9 53.7