No-deal Brexit fears continue to weigh on the pound
What’s been happening?
Pound Sterling – UK Markets
Despite a lack of macroeconomic data releases from the UK, the pound fell to its lowest level against the dollar in nearly a year and continued to weaken against the euro also as markets seem to be focusing on the possibility of a no-deal Brexit.
Speaking to reporters on Monday, James Slack, Prime Minister Theresa May’s spokesperson, stated that recent comments by Trade Minister Liam Fox about the risk of a no-deal outcome increasing were reflecting the truth and added that the government had to prepare for all eventualities. Meanwhile, news outlets on Monday reported that according to a leaked account of his comments to a group of City of London business leaders in July, Chancellor Philip Hammond warned that France would try to make Paris Europe’s new financial centre by luring financial corporations that flee the UK. According to The Financial Times, “it is important that the UK is able to display in parallel a strategy to grow non-European financial services business, such that the threat to pull out of EU arrangements is seen to be real,” Hammond told the audience.
US Dollar – US Markets
The dollar was able to preserve its strength on Monday as investors continued to price the Fed’s hawkish monetary policy outlook. After last Friday’s employment report, the CME Group FedWatch Tool’s probability of a rate hike in September rose to 94% while the odds of one more 25 bps hike in December improved to 66.7% compared to 65.1% on August 3. Although falling US T-bond yields on Monday forced the US Dollar Index to ease off monthly highs that it recorded in the early trading hours of the American session, it recorded gains on a daily basis for the fourth straight day.
According to the July 2018 Senior Loan Officer Opinion Survey released by the Federal Reserve on Monday, banks reported stronger demand for commercial and industrial loans by small firms and weaker demand for commercial real estate loans. The publication further revealed that demand for consumer loans was unchanged.
Euro – European Markets
The shared currency struggled to find demand on Monday after the factory orders data from Germany, the euro area’s biggest economy, missed analysts’ estimates by a wide margin. Bundesbank reported that factory orders contracted by 4% on a monthly basis in June following May’s 2.6% expansion to suggest that the industrial sector started the third quarter of the year on a weak note. Today’s data also confirmed the negative outlook for the manufacturing sector that was highlighted in the latest Ifo and PMI publications.
On a positive note, the Investor Confidence Index released by Sentix BmbH rose to 14.7 in the eurozone in August from 12.1 and surpassed the market expectation of 13.5. Commenting on the improved sentiment, “a complete all-clear cannot yet be given, because with negative expectations, the economy is still in a cooling off phase. But investors seem to see the dangers of an escalation in the trade dispute initiated by US President Trump much less acute,” Sentix wrote.
What’s coming up?
UK: The only data release from the UK on Tuesday will be HBOS’ Halifax House Price Index. Brexit headlines are likely to be the primary driver of the pound’s market valuation.
US: The U.S. Bureau of Labor Statistics will publish JOLTS Job Openings data, and the Investor's Business Daily (IBD) will release the Economic Optimism Index. Furthermore, the Fed is scheduled to report the consumer credit change later in the day.
EU: The European economic docket on Tuesday will feature Germany’s industrial production, which is expected to fall to -0.5 in June from +2.6% in May, trade balance, and current account figures.