Sterling Surges as Central Bank Decisions Loom

The pound surges to 6-week highs as Brexit sentiment improves, while oil prices jump after Saudi attacks ahead of a key week of central bank decisions.

Previous Day's Market Highlights

Friday the 13th was not unlucky for the pound, as sterling surged into the weekend, in line with an improvement in Brexit sentiment. Markets became increasingly optimistic that an amelioration in UK-EU relations, and a potential softening of the DUP's stance, could lead to a breakthrough in talks over the Irish backstop, clearing the path to a renegotiated Brexit deal. Reports from The Telegraph stated that there had been "serious engagement" between negotiators on both sides of the Channel for the first time, while also indicating that the tone and substance of negotiations seemed to have improved. The more upbeat Brexit tone, along with data earlier in the week showing the labour market in excellent health and July's GDP data helping to allay concerns over a recession helped the pound to record its strongest weekly gain against the dollar since May, while simultaneously recording the longest weekly winning streak against the euro since late-2016. On Friday alone, sterling added 1.3% against the dollar, breaking through both the key $1.24 and $1.25 levels to reach a 6-week high. Against the common currency, sterling traded 1.1% higher, reaching its highest levels since early-June, just shy of the €1.13 handle.
Elsewhere, the dollar declined despite data showing the consumer remaining upbeat, as market participants grew a little nervous ahead of next week's FOMC policy decision. Retail sales increased by 0.4% MoM in August, double the expected pace, and the 6th straight monthly increase, further evidencing the strength of the US consumer. The details of the sales report were also relatively upbeat, with the consumption-focused control group sales measure increasing by 0.3% MoM. Upbeat consumer sentiment  figures also failed to lift the dollar, with the University of Michigan's index recovering to 92.0 in September, indicating that the strong pace of spending should continue in the months ahead, underpinning economic growth. Over the course of the day, the dollar lost 0.45% against a basket of peers, recording back-to-back daily losses for the first time in just over a week.
Meanwhile, the common currency was subdued, gaining a shade over 0.1%, as market participants continued to digest the ECB's sweeping stimulus package. In contrast, both the Canadian and Kiwi dollars struggled, largely as a result of narrowing yield spreads between these currencies and their US counterpart as Treasury yields increased across the curve. Both currencies ended Friday around 0.5% lower.
Away from FX, European equity markets ended the week with gains, with the pan-continental Stoxx 600 adding 0.35%, and London's FTSE 100 closing 0.4% higher. Finally, oil prices settled lower on Friday, with Brent losing 0.2% and WTI shedding 0.2%. However, prices jumped by as much as 20% at Sunday evening's open, after roughly half of Saudi Arabia's production was knocked out by a drone attack at the weekend. At the time of writing global benchmark Brent trades at $66.63bbl, having pulled back from an earlier high over $71bbl.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1265 1.1289 1.0930 3.18%
GBP/USD 1.2470 1.2506 1.1958 4.38%
EUR/USD 1.1095 1.1164 1.0926 2.13%
GBP/AUD 1.8140 1.8336 1.7792 2.97%
GBP/NZD 1.9525 1.9612 1.8996 3.14%
GBP/CAD 1.6505 1.6608 1.5956 3.93%

Today's Market Highlights

What's shaping up to be another busy trading week begins with a quiet economic calendar, ensuring that geopolitics should remain the main centre of attention. Today's highlight will likely be the first in-person meeting between Prime Minister Boris Johnson and EU Commission President Juncker, with markets on alert for any further signs that UK-EU talks may be inching closer to an agreement. While PM Johnson will likely reiterate his stance that he will not request a Brexit extension, any additional signs of the two sides edging closer to common ground, and the avoidance of a no-deal Brexit in October, would likely be met with further upside for the pound. The Prime Minister will also hold talks with EU Chief Brexit Negotiator Michel Barnier today, with news from this meeting also set to be closely watched.
Elsewhere, markets will be keeping a keen eye on any headlines regarding US-China trade relations, in addition to those stemming from increasing geopolitical tensions in the Middle East after the weekend's oil pipeline attack. Commodity-sensitive currencies, such as the Canadian dollar and Norwegian krone, will be particularly susceptible to any news from Saudi Arabia, with both currencies likely to benefit from a sustained rally in oil prices. On the data front, markets will pay attention to manufacturing activity data from New York State, in addition to parsing minutes from the RBA's recent policy decision, due overnight, for any signs of additional easing on the horizon.
Looking ahead to the remainder of the week, Wednesday's Federal Reserve policy decision highlights the calendar, with the FOMC set to deliver another 25bps rate cut, bringing the target range for the Fed Funds Rate to 1.75% - 2.00%. The FOMC's rate cut is unlikely to be a unanimous decision, while those expecting an aggressive path of policy easing are likely to be disappointed with a strong consumer giving the Fed little reason to contemplate delivering on the 75bps of easing financial markets are pricing in by year-end. This week's central bank bonanza continues on Thursday, when the BoJ, SNB and BoE are all set to leave policy on hold. However, the Norges Bank are set to continue bucking the global trend of policy easing, with policymakers set to announce their 3rd 25bps rate hike this year, bringing rates to 1.50%.
The week ahead is also busy in terms of economic data, with inflation releases from the UK, eurozone, Canada and Japan the main reports. Markets will also be focusing on Tuesday's ZEW sentiment surveys from the eurozone, in addition to 2nd quarter GDP figures from New Zealand and August's labour market report from Australia.

Today's Economic Calendar

Time Currency Release Consensus Previous
All Day GBP PM Johnson Holds Brexit Talks with EU Commission President Juncker
1:30pm USD NY Empire State Manufacturing Index (Sep) 4.55 4.80
2:30am (Tues) AUD RBA Meeting Minutes