No-deal opponents agree strategy
Politics continued to move Sterling, especially when EU Commission President Jean-Claude Juncker stated that he would negotiate if the UK put forward suitable proposals. The UK’s opposition parties agreed cooperation and a legal framework to try and prevent a ‘no-deal’ Brexit. The most likely mechanism is legislation to force the government to request a further extension if no deal is in place; successfully used on the last extension. The current government insisted that it is working on a solution to the Irish border issue and the Pound continued to gain on short covering (buying Pounds to close bets against) despite no definitive developments.
The Pound rose above 1.2300 on the Dollar (4-week high) and 1.1086 against the Euro. Chancellor Sajid Javid will announce substantial fiscal spending plans next week as the spending review was brought forward. The Pound opens slightly lower this morning at 1.2275 on the Dollar and 1.1065 on the Euro. In the absence of tier one UK economic data, markets will continue to be febrile on political developments.
The Dollar struggled to make headway yesterday, as concerns over the drawn out trade dispute between the U.S. and China and its knock-on effects on the global economy saw bond yields continue to slide.
Having started off the week quite shaky, a recovery seems to be on the cards as safe-haven Treasury yields bounced from multi-year lows after U.S. President Donald Trump sought to ease trade tensions by predicting another round of talks with Beijing. China’s foreign ministry, however, reiterated on Tuesday that it had not received any recent contact from the U.S. on trade. An escalation in the trade tensions between the world’s two largest economies have stifled financial markets in recent days with both sides threatening to slap extra tariffs, worth billions of dollars on each other’s goods.
The dollar’s peers, notably the safe-haven yen, have been boosted as long-term Treasury yields deepened the inversion of the U.S. yield curve. A bond yield curve inverts when long-term yields trade below short-term yields and is commonly considered a signal of an impending economic recession.
ECB Vice President De Guindos stated that policy is data dependent not market dependent and that market expectations cannot replace the bank’s policy judgement. The comments illustrated that the central bank will want to emphasise its independence ahead of September’s policy meeting, although he also stated that the bank needed to act with determination. An Italian Democratic Party official stated that coalition talks were close to collapse, increasing the potential for fresh elections, although the rhetoric was more positive later in the session with crucial inter-party talks scheduled for later today.
The Euro was unable to hold above 1.1100 yesterday against the Dollar, although a tight range still prevails as uncertainty continues to dominate the financial markets.
Data to watch
15.30 USD – Crude Oil Inventories