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White knuckle ride for Sterling

White knuckle ride for Sterling

GBP
The August PMI services-sector index edged up to 54.3, beating expectations of 53.9 after the order book strengthened and employment rose at the fastest pace in 6 months.

Brexit advocate and Ex Bank of England Governor Mervyn King’s criticism of the handling of the Brexit approach and negotiations undermined the Pound despite German PM Angela Merkel’s broadly positive comments. Sterling dipped below 1.2800 against the Dollar and the Euro strengthened to 1.1050 by midday. Around 2pm Sterling came roaring back across the boards after Bloomberg reported that the UK and Germany had dropped key Brexit demands and with fewer details to negotiate, a deal was closer. The Pound surged above 1.2950 against the Dollar while the Euro declined to near 1.1160.

When the German government refuted reports that their position had changed Sterling suffered a sharp retracement and the Euro rate fell to near 1.1111, although still up on the day and held just above 1.2900 against the Dollar. Also, a disgruntled voice from Brussels added that Germany do not solely decide EU policy.

So the lesson after yesterday’s rollercoaster is that Sterling is likely to be ever more volatile as the slated negotiation end point draws close. The ease with which Sterling spiked yesterday seems to indicate a Sterling rally on the announcement of any Brexit deal; but will it appear and when?

USD

The USD continues to strengthen on President Trump’s plans to impose up to $200 billion worth of tariffs on China however was mixed yesterday because of the strange ongoings in the Eurozone. The Greenback also drew support from a favourable report from the Federal Reserve with an interest rate hike looking almost inevitable.

US President Trump explained that the trade talks with Canada were coming along nicely and the outcome would be announced in the next few days however, the news failed to receive a meaningful reaction from the market.

Exports in the US in July fell for the second straight month, down another 1.0% with a drop on the goods side leading to an rise in service exports.

Looking ahead, the ADP report later today should give markets an idea of the upcoming Non-farm Payrolls expected tomorrow. In addition, weekly Initial Claims are due seconded by Factory Orders, Durable Goods Orders and the more relevant ISM non-manufacturing.

EUR

Italian bonds continued to perform strongly yesterday with yields achieving a one month low. There was also a positive sentiment around the Italian budget position, narrowing of the Italian-German yield spreads and an upward movement in German yields all contributed to positive moves in the Euro.

Angela Merkel’s CSU coalition drafted a document calling for the ECB to end its programme of low interest rates and quantitative easing which also gave support to the Euro. The currency hit the 1.1650 mark versus the Dollar and the 1.1150 mark versus the Pound before correcting lower at the end of the session. Final Euro-zone PMI data was unchanged.

Data today is very minimal, with the most significant news expected to be Swiss GDP figures or a speech by the Swiss SNB Government Board Member Zurbrugg.

Data to Watch

12:15 USD ADP Employment Change (Aug)
12:30 USD Continuing Jobless Claims (Aug 24)
12:30 USD Initial Jobless Claims (Aug 31)
12:30 USD Unit Labor Costs (Q2)
12:30 USD Nonfarm Productivity (Q2)
13:45 USD Markit Services PMI (Aug)
13:45 USD Markit PMI Composite (Aug)
14:00 USD ISM Non-Manufacturing PMI (Aug)
14:00 USD Factory Orders (MoM) (Jul)

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