What’s been happening?

Pound Sterling – UK Markets 

The British pound recovered the losses it suffered against the dollar on Tuesday and rose to its highest level in more than a month against the euro. Although there were no macroeconomic data releases from the UK that could have helped the currency gather strength, new British Prime Minister Boris Johnson’s remarks after being asked to form a government during his meeting with the Queen at the Buckingham Palace provided support.

Johnson reiterated that they will come out of the EU on October 31 but made it clear that they did not want a no-deal Brexit. “We don't want a no-deal. Preparations for no-deal won't be wasted, we will need to be ready to leave the EU customs union," Johnson said. "We will create a new partnership with EU friends. Convinced we can do a deal without checks on the Irish border."

US Dollar – US Markets

The dollar struggled to preserve its strength during the first half of the day with the US Dollar Index retracing a small portion of this week’s rally but gained traction during the American session despite some disappointing data and allowed the index end the day flat.

The IHS Markit’s Flash US PMI report today revealed that the business activity in the manufacturing sector stagnated in July with the Manufacturing PMI retreating to the 50 marks. However, the Services PMI advanced to 52.2 from 51.5 and surpassed the market expectation of 51.7 to keep the selling pressure limited on the currency. Commenting on the data, "The survey data indicated that the economy started the third quarter on a disappointingly soft footing," Chris Williamson, Chief Business Economist at the IHS Markit said. "The PMIs for manufacturing and services collectively point to annualized GDP growth of just 1.6%, up only very marginally from a lacklustre 1.5% indicated by the survey in the second quarter." 

Meanwhile, during an interview with CNBC, US Treasury Secretary Mnuchin confirmed that he will be travelling to China next week for a new round of trade negotiations but noted that he was expecting to have at least a few more meetings before any real breakthrough. 

Euro – European Markets

The shared currency fell to its lowest level in nearly two months against the dollar while extending its slide vs the pound sterling. Disappointing PMI data from both the euro area and Germany weighed on the euro as it caused markets to start pricing an aggressive dovish shift in the European Central Bank’s forward guidance in tomorrow’s announcements.

The Markit Manufacturing PMI in Germany slumped to its lowest level in seven years at 43.1 to miss analysts’ estimate of 45. “The health of German manufacturing went from bad to worse in July, according to the flash PMI data, raising the risk of the euro area’s largest member state entering a mild technical recession,” noted Phil Smith, principal economist at the IHS Markit. For the eurozone, the Manufacturing PMI dropped to 46.4 from 47.6 to show that the business activity continued to contract at a faster pace than it did back in June. Although Services PMI readings came in above 50 to show the sector remained healthy in the same period, it failed to help the currency recover its losses.

What’s coming up? 

UK: The Confederation of British Industry will release the Distributive Trade Survey on Thursday.

US: The goods trade balance, durable goods orders, weekly jobless claims and wholesale inventories will be featured in the US economic docket.

EU: The European Central Bank will announce the interest rate decision, which is expected to remain unchanged at 0%, and releases the policy statement. President Draghi will deliver his prepared statement on the policy and respond to questions from the press at 12:30 GMT.