Sterling drops on Parliament suspension
Sterling retreated sharply on Wednesday following reports that parliament would be prorogued or suspended from around September 10th until October 14th when the government would present a Queen’s Speech of new policies. The move, confirmed later by the Queen, will make it more difficult for parliament to block any ‘no-deal’ Brexit with a severe lack of debating time. Political tensions also intensified immediately with strong protests against the move from opposition politicians and expectations of a no-confidence vote increasing against the government next week. Sterling declined sharply with a dip to lows below 1.2160 against the Dollar and 1.0963 against the Euro.
EU sources suggested that the risk of a ’no-deal’ outcome had increased and rhetoric remained intense. Political developments will continue to be monitored very closely with further choppy trading likely in the coming days and weeks ahead.
Richmond Federal Reserve head Barkin stated that the Fed was monitoring the impact of July’s cut. San Francisco head Daly stated that she is biased towards running the economy hot given low inflation and uncertainty over full employment while persistently undershooting the 2% inflation goal is worrisome. There was little evidence that the FOMC would look to sanction an aggressive near-term rate cut. Futures markets indicated that there was close to a 100% chance that the Fed Funds rate would be cut by 0.25% in September with only fractional expectations of a 0.50% cut.
Euro-zone M3 money supply growth strengthened to 5.2% in the year to July from 4.5% previously which should dampen pressure for aggressive monetary stimulus. There was no shift in expectations that the ECB would announce a comprehensive package to ease policy at the September policy meeting including a cut in interest rates. The Euro was unable to benefit and it held below 1.1100 against the dollar as the US currency maintained a firm overall tone. German 10-year bond yields declined to fresh record lows below 0.7% which undermined potential Euro support
After the European close it was confirmed that the Italian Democrats (PD) would form a coalition with the 5-Star party with Conte remaining as Prime Minister. Italian 10-year bonds declined to a record low around 1.0% There was still no Euro benefit from the move as it traded around 1.1080 with the Dollar still gaining net support from a lack of attractive alternatives.
Data to watch
13.30 USD – Prelim GDP