Sterling Takes a Pounding

Sterling tumbles after no-deal Brexit rhetoric intensifies, while markets begin to focus on Wednesday’s Fed policy decision.

Previous Day's Market Highlights

The pound ended Monday battered and bruised, languishing at more than 2-year lows against the dollar, having experienced its biggest 1-day fall since mid-March as a now familiar equation proved correct once again; as the chances of a no-deal Brexit increase, sterling depreciates. Investors were once again gripped by concerns over a no-deal divorce after weekend reports of the government working on the assumption of a no-deal exit, in addition to reports of a 'War Cabinet' being set up to drive through Brexit and PM Johnson's refusal to begin UK-EU negotiations until the contentious Irish backstop is dropped. This demand is incompatible with the EU's current stance of not wishing to re-open the legally binding Withdrawal Agreement, hence the increased chances of a no-deal Brexit. Sterling's fall was exacerbated by a barren economic calendar, as well as investors' concerns over the Bank of England striking a relatively cautious tone at this Thursday's policy decision. Over the course of the day, sterling shed 1.2% against the dollar, falling to a 28-month low just above the $1.22 handle. Sterling's torrid time continued against the euro, with the pound shedding 1.35% to hit the lowest levels seen in regular trading since September 2017, below the $1.10 mark.Sterling extended its losses overnight, losing a further 0.7% against both the dollar and the euro, with the pound experiencing a major lack of demand throughout Asian trading. With no-deal rhetoric only likely to increase over the summer, and Parliament unable to attempt to block such an outcome until September at the earliest, the balance of risks for the pound is tilted firmly to the downside. 

Elsewhere, all other G10 FX pairings remained relatively well-confined to recent trading ranges, with a lack of major economic releases and nervousness ahead of Wednesday's FOMC decision contributing to the subdued trading conditions. The single currency chalked up a gain of just over 0.2% against the dollar, while the greenback recorded a 3rd consecutive daily gain against a basket of peers, adding 0.15%. Overnight, the yen has gained some ground after a less dovish than expected message from the Bank of Japan (BoJ). The BoJ left monetary policy settings on hold, with benchmark interest rates at -0.10%, while also maintaining forward guidance that rates will remain unchanged until spring 2020. In line with other global central banks, the BoJ emphasises that risks facing the economy were tilted to the downside, while reiterating that policymakers will not hesitate to take policy action should it be required.

Away from FX, European equity markets ended the day in the green. The pan-continental Stoxx 600 added 0.15%, while London's FTSE100 added just under 2% - the index aided by significant M&A activity as well as a weak pound. Meanwhile, in the US, the benchmark S&P 500 closed 0.17% lower. Finally, oil prices remained firm, buoyed by continued Middle East tensions and the prospects of looser monetary policy from the Fed. Global benchmark Brent settled 0.4% higher, while US WTI crude gained 1.2%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.0910 1.1246 1.0880 3.25%
GBP/USD 1.2150 1.2587 1.2118 3.73%
EUR/USD 1.1135 1.1285 1.1100 1.64%
GBP/AUD 1.7610 1.8041 1.7560 2.67%
GBP/NZD 1.8335 1.8960 1.8278 3.60%
GBP/CAD 1.6000 1.6445 1.5963 2.93%

Today's Market Highlights

The day ahead sees a number of major economic releases, though market participants will likely be focusing on tomorrow's Federal Reserve policy decision, with a 25bps rate cut expected, as policymakers begin their 2-day meeting today. 

From the US, today's main highlight will likely be June's core PCE price index, the Fed's preferred gauge of inflation. Markets expect the index to have increased at the fastest pace since February at 1.7% YoY, while remaining unchanged at 0.2% MoM. Although the data is unlikely to alter the chances of the Fed cutting rates this month, a hotter than expected inflation print would likely dent the chances of additional policy easing in the coming months, posing an upside risk to the dollar. Other notable US releases today include July's consumer confidence figures, likely to tick up to an extremely healthy index reading of 125.0, as well as June's pending home sales, set to increase by 0.5% MoM. While the aforementioned data points may have limited immediate impact on the market, a continued healthy level of consumer confidence should see consumer spending remain resilient in the months ahead, helping to underpin economic growth.

Turning to the eurozone, while markets continue to digest last week's ECB policy decision, a slew of sentiment surveys will be released this morning. Usually, primary focus falls on the business climate survey, with the index set to fall to 0.10 this month - a 6th consecutive monthly decline, and set to be the index's lowest level since October 2013. Meanwhile, final consumer confidence figures should show the consumer remaining pessimistic, reading -6.6, while the economic sentiment indicator is set to decline to a more than 3-year low. Continued weak sentiment across the bloc will do little to deter the ECB from introducing significant additional stimulus in September.

Elsewhere, politics will continue to dominate for the pound, with sterling set to continue trading as a barometer for the perceived risk of a no-deal Brexit panning out. Meanwhile, the European session's only other notable release will be the monthly Swiss economic barometer, a useful leading indicator of economic performance, the index is set to decline to 93.0, a reading which would be the lowest since April 2015. Overnight, Q2 CPI figures from Australia will be eyed, as markets continue to price in additional policy easing from the RBA, with another 25bps cut fully priced by year-end. CPI is set to increase at 1.5% YoY, still well-below the RBA's target level. Also due overnight will be official PMI data from China, for both the manufacturing and non-manufacturing sectors, set to be closely examined as markets continue to gauge the impact of ongoing trade tensions.

Today's Economic Calendar

Time Currency Release Consensus Previous
8:00am CHF KOF Economic Barometer (Jul) 93.0 93.6
10:00am EUR Business Climate (Jul) 0.10 0.17
10:00am EUR Consumer Sentiment (Final - Jul) -6.6 -6.6
1:30pm USD Core PCE Price Index (YoY - Jun) 1.7% 1.6%
3:00pm USD Consumer Confidence (Jul) 125.0 121.5