Commons chaos as Boris blocked
ServicesComm sector PMI’s continued to indicate expansion in August, albeit at a slower pace than expected and business confidence trails at 3-year lows. The composite PMI index was a whisker above the 50.0 mark, but the data hinted at a GDP contraction in Quarter 3 which maintained negative Sterling sentiment. Despite political tensions simmering, the Pound traded above 1.2200 against the Dollar amid short covering. Bank of England Governor Mark Carney stated that ‘no-deal’ economic impact had been eased by preparations made, but that the economy was weak. He also indicated a preference for monetary easing in the event of a disorderly Brexit, although other members were less convinced given a likely inflation spike.
The government announced increased budget spending and the House of Commons passed legislation to prevent a ‘no-deal’ on October 31st. Prime Minister Johnson’s call for a General Election was rejected. Sterling continued to gain on decreased “no-deal” risk but uncertainty remains at peak levels given on-going political manoeuvring and potential surprises. Sterling opens at 1.2240 on the Dollar this morning and the Euro near the key 1.1111 support area.
US dollar bears are out of the woods following the release of lower than expected ISM PMI report card. The index saw a contraction to 49.1, the lowest reading since January 2016, sending fears that ongoing trade tensions between China and the US and a series of taxes are starting to take its toll on the wider economy.
The Beige Book reported little change in conditions. New York Federal Reserve (Fed) President Williams stated that he is ready to act as appropriate to support the economy and a return to 2% inflation. He also stated that the Fed needed to be flexible while recent revisions suggested less robust momentum in the economy. His focus was on persistently low inflation and disinflationary pressures from overseas and he was not ready to say what action is appropriate this month.
The greenback retreated versus most major currencies with the Sterling swinging to the upside. The focus today will be on speeches from several Federal Open Market Committee members, who seem to be divided on the next course of action by the Fed.
The euro-dollar climbed above the key psychological level of 1.1000, showing a bit of over-reaction, supported by slightly better than expected PMIs across the Eurozone and a general US dollar weakness. The Euro-zone PMI services-sector index was revised slightly higher to 53.5 from the flash reading of 53.4 with the French index at 9-month highs.
European Central Bank (ECB) President-Elect Lagarde is also said to believe that further accommodative monetary policy may be required to avoid recessionary pressure. Overall, there was some fresh speculation that the ECB package of monetary measures in September would fall short of market expectations which encouraged an element of short covering and US-German 2-year yield spreads narrowed to the lowest level since October 2017 which provided net support.