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Boris on a charm offensive with EU leaders

Boris on a charm offensive with EU leaders

GBP

UK CBI industrial orders index strengthened to -13 for August, up from the nine year low of -34 in July and significantly above consensus forecasts. The decline in export orders also eased but underlying confidence remained fragile. The Pound suffered renewed pressure after EU Council President Donald Tusk insisted that the Northern Ireland backstop must remain. Sterling dropped to near 1.2060 against the Dollar while the Euro advanced to 1.0890. 

There was a sharp reversal later by mid-afternoon following comments from German Chancellor Angela Merkel that “practical solutions” as an alternative to the backstop should be sought. The spike saw Sterling surge to 1.0987 on the Euro and 1.2170 on the Dollar before settling a little lower. The Bank of England has confirmed that the new Governor will not be named until after Brexit; Mark Carney is due to leave at the end of January 2020. 

Confidence in the political outlook remains poor and with no economic data Boris’ meeting today with Angela Merkel will be very closely watched. 

USD

There was a lack of major US releases, but the US Philadelphia Federal Reserve (Fed) non-manufacturing index declined to 7.5 for August from 21.4 with orders components also registering a notable slowdown while employment continued to increase. 

From lows below 1.1070, the Euro rallied against the Dollar to the 1.1100 area as the dollar lost some traction late yesterday. Markets will be looking at today’s release of Fed minutes from July’s meeting for further evidence on Fed thinking. There will also be caution ahead of Friday’s speech by Fed Chair Powell.

EUR

The Euro rose yesterday to 1.1106 from earlier lows of 1.1065 against the Dollar, ending its five-day continuous losing streak. Those gains, however, can very easily be erased if Italian yields rise due to its political uncertainty and the Fed minutes endorse Chairman Powell’s reluctance to aggressively cut interest rates.

Italy’s government also collapsed yesterday, as Prime Minister Conte tendered his resignation. On the way out, criticising Lega leader Salvini with comments that the August political crisis is likely to pave the way for an Autumn election. As a result, the 10-year Italian government bond yield fell by more than five basis points with investors believing the crisis will soon be resolved soon, potentially paving the way for a coalition government. As of writing, EUR/USD is trading at 1.1095, with no major news releases out today. 

 

Data to watch

09.30 GBP – Public Sector Net Borrowing

19.00 USD – FOMC Meeting Minutes

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