Sterling Slumps on Short-Lived Brexit Optimism

Sterling struggles as Friday’s Brexit optimism proves temporary, while markets seek a haven as US-China trade talks conclude early.

Previous Day's Market Highlights

The pound was brought back down to earth with a bump on Friday, as the Brexit optimism sparked by EU Commission President Juncker's interview proved to be incredibly short-lived. Having hit a 2-month high against the dollar in early trading, sterling slid throughout the day, settling below the key $1.25 level. The pound's decline stemmed from a couple of sources. Firstly, markets realised that despite Juncker's desire and belief that a deal can be struck, the two sides have yet to make any further concrete progress in negotiations; a fact noted by Irish Foreign Minister Coveney, who stated that the EU are still waiting for formal proposals from the UK. Secondly, a number of reports pointed to the EU being less optimistic that an alternative to the backstop can be found. Chief Negotiator Barnier reportedly sees the current proposals to replace the backstop as a 'backwards step', while other EU officials reportedly view the UK's current proposals as 'an utter waste of time'. These comments weighed on the pound across the board, with sterling shedding 0.4% against the dollar, and 0.2% against the euro over the course of the day.

Elsewhere, markets struck a risk-off tone after Chinese trade negotiators cancelled a planned agricultural visit to Montana, and returned to Beijing sooner than expected. With no confirmation from either the US or China as to the reasons behind the early departure, markets assumed the worst, believing that talks had collapsed and relations may have soured. This line of thinking resulted in the typical demand for safe-havens. The US dollar added 0.3%, while the Japanese yen and Swiss franc notched similar gains as Treasury yields fell across the curve. The more risk-averse tone had a detrimental impact on equity markets (detailed below), as well as the Aussie and Kiwi dollars, both of which settled 0.5% lower on the day.

Turning to economic releases, Friday's calendar was relatively quiet, with Canadian retail sales the main highlight. Data showed softer than expected sales in July, with headline sales increasing by 0.4% MoM, and sales excluding automobiles dipping by 0.1% MoM. While the softer than expected release erased some of the positive sentiment around the Canadian economy, the impact on the loonie was limited, with the currency closing unchanged, recovering from a brief dip immediately after the release. Friday's only other notable report was preliminary eurozone consumer confidence figures, showing the index reaching a 4-month high of -6.5 in September. However, consumers remain pessimistic about the outlook, with the euro unmoved by the release.

Away from FX, equity markets were mixed on either side of the Atlantic. European trading closed before news broke of US-China negotiations ending early, hence the pan-continental Stoxx 600 closing 0.3% higher. Across the pond, the benchmark S&P 500 was dragged lower by the risk averse tone, closing with losses of 0.5%. Finally, oil prices were subdued on Friday, though both Brent and WTI were on track for a weekly gain of more than 6% after last weekend's Saudi pipeline attacks sparked supply concerns.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1360 1.1381 1.0930 3.96%
GBP/USD 1.2470 1.2583 1.1958 4.97%
EUR/USD 1.1025 1.1110 1.0926 1.66%
GBP/AUD 1.8400 1.8496 1.7792 3.81%
GBP/NZD 1.9885 2.0003 1.8996 5.03%
GBP/CAD 1.6550 1.6691 1.5956 4.40%

Today's Market Highlights

A fresh trading week sees a relatively busy economic calendar, with the eurozone in focus today, as September's PMI surveys are released. This month's flash data is set to, once again, show a divergence between the manufacturing and services sectors, while market participants will also parse the release for any immediate impact of the ECB's sweeping stimulus package. The survey is set to show the manufacturing sector remaining in contraction for an 8th consecutive month, with the PMI expected at 47.3. Meanwhile, activity in the services sector is expected to soften modestly, the PMI set to print 53.3, perhaps a tentative sign that the economic slowdown is spreading away from just the manufacturing sector. Today's other releases are of less importance, and will likely have a relatively muted impact on price action, including activity figures from the Chicago Fed and wholesale sales data from Canada.

Elsewhere today, markets will be on alert for the Supreme Court's decision on the prorogation of Parliament, set to be announced either today or tomorrow. Should the Court rule that the prorogation is unlawful, MPs may be recalled, potentially resulting in more uncertainty, and therefore more volatility for the pound. Meanwhile, the annual UN General Assembly kicks off today, hence investors will be watching for any breakthroughs on the major geopolitical issues of the day - namely; global trade protectionism, Brexit and increasing tensions in the Middle East. 

A number of central bank speakers are also due today. Market participants will be primarily paying attention to remarks from ECB President Draghi, which are likely to reiterate the ECB's push for fiscal stimulus from eurozone governments, while also providing further explanation of the rationale behind September's policy decision. Speeches are also due today from FOMC members Williams, Daly and Bullard; ECB Chief Economist Lane and BoE MPC member Tenreyro.

Turning to the week ahead, remarks on monetary policy will remain in focus, with a plethora of central bank speakers due. Of most importance will be remarks from BoJ Governor Kuroda (Tues), RBA Governor Lowe (Tues), ECB President Draghi (Thurs) and BoE Governor Carney (Thurs). Investors will parse remarks from all of the aforementioned policymakers, along with a slew of Fed speakers, for hints on the monetary policy outlook, with markets continuing to price in an aggressive pace of policy easing around the world. This week's RBNZ policy decision will also be eyed, with expectations for policy to remain on hold, though policymakers should maintain their easing bias.

Elsewhere, this week's data calendar is relatively light. Tuesday's US consumer confidence figures, along with Friday's final consumer sentiment figures, are the main events, with the US consumer remaining the growth engine of the economy. Speaking of economic growth, the final estimate of US Q2 GDP should be a non-event, barring any significant revisions from the 2nd estimate's 2% growth pace. Market participants will also be paying attention to Tuesday's IFO surveys from Germany, in addition to Friday's eurozone sentiment surveys. This week's UK data calendar is bare.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:00am EUR Flash Manufacturing PMI (Sep) 47.3 47.0
9:00am EUR Flash Services PMI (Sep) 53.3 53.5
9:00am EUR Flash Composite PMI (Sep) 51.9 51.9
1:30pm USD Chicago Fed Activity Index (Aug) -0.35 -0.36