Pound struggles to find demand as PM May prepares for a no-deal Brexit summit
What’s been happening?
Pound Sterling – UK Markets
The sterling extended its losses against its rivals on Wednesday and touched its lowest level of the year both vs. the dollar and the euro as no-deal Brexit concerns continued to push investors away from it. Citing people familiar with the matter, Bloomberg reported that British Prime Minister Theresa May was planning to have a meeting with her top ministers in September to discuss how to prepare for a no-deal Brexit.
Before he leaves his role at the Bank of England’s Monetary Policy Committee, Ian McCafferty gave an interview to Sky News on Wednesday and argued that the UK’s economy was “poorer” than it would be if it had voted to stay in the EU. Commenting on the BoE’s forward guidance, "if we were to give a lot of very specific forecasts about where interest rates would be in a year or 18 months on, the economy may not pan out exactly in a way that would justify exactly that policy path, and as a result we would then start to lose credibility and trust," McCafferty said.
US Dollar – US Markets
With an empty economic docket in the U.S. on Wednesday, the US Dollar Index, which tracks the dollar against a basket of six major currencies, struggled to make a decisive move in either direction. News of China imposing new 25% tariffs on $16 billion worth of U.S. goods starting on August 23 forced the buck to stay weak against safer currencies such as the yen and the franc. On the other hand, speaking at an event in Roanoke, Virginia, Richmond Fed President Tom Barkin argued that the tight labor market conditions and the inflation growth rate warranted further rate hikes to help the dollar limit its losses.
Touching on Trump administration’s trade policy, Barkin noted that tariff concerns were making people more nervous than they did a few months ago and added that the potential negative impact on business investment could hurt the labor market.
Euro – European Markets
Brexit jitters and the dollar’s uninspiring performance on Wednesday allowed the euro to stay in the spotlight. Moreover, the European Central Bank adopted an optimistic tone in its Monthly Economic Bulletin to provide an additional boost to the shared currency.
“Private consumption has been the main driver of the recent economic expansion, but there is still scope for further growth,” the ECB said in its publication according to Reuters, which is scheduled to be released on Thursday. “As labor markets continue to improve, consumer confidence should remain elevated and private consumption should rise further,” the ECB further added and noted that there was little evidence of low-interest rate had led to generalized increases in household indebtedness to support the view of the economic expansion becoming sustainable.
What’s coming up?
UK: Brexit headlines are likely to continue to impact the sterling’s market valuation on Thursday.
US: The U.S. Department of Labor will publish the weekly initial jobless claims report, and the Bureau of Labor Statistics will release the July PPI figures, which is expected to stay unchanged at 3.4% on a yearly basis. Charles L. Evans, the ninth president and chief executive officer of the Federal Reserve Bank of Chicago, will be delivering a speech later in the day.
EU: The European Central Bank will publish its Monthly Economic Bulletin on Thursday. However, Reuters already reported the highlights of that publication on Wednesday and the market is unlikely to pay any attention to it.