Sterling Rises Sharply on Hopes of Parliament Blocking No-Deal Brexit
What’s been happening?
Pound Sterling – UK Markets
The British pound rose to its highest level vs the dollar in a month on Tuesday boosted by hopes of parliament blocking a no-deal Brexit. Against the euro, the currency gained more than 0.5% on a daily basis.
Following today’s critical meeting, UK opposition leaders in a joint statement voiced their commitment to stop the UK from leaving the EU without a deal. “The leaders of the opposition parties held a productive and detailed meeting on stopping a disastrous no-deal exit from the EU," the Labour Party, SNP, Liberal Democrats, Plaid Cymru, the Green Party and the Independent Group for Change said in the joint statement. "The attendees agreed that Boris Johnson has shown himself open to using anti-democratic means to force through no-deal," the statement further read.
Later in the day, British Prime Minister Johnson’s spokeswoman told reporters that the PM had set out a range of options as alternatives to the Irish backstop during a meeting with his Dutch counterpart Rutter on Tuesday. On the same note, a government spokeswoman said that they were working to find a wide range of flexible and creative solutions to the backstop. "We are ready to negotiate in good faith an alternative to the backstop with provisions to ensure the Irish border issues are dealt with where they should always have been: in the negotiations on the future agreement between the UK and EU," the spokeswoman stated.
US Dollar – US Markets
The upbeat macroeconomic data releases from the US on Tuesday helped the US Dollar Index cling to Monday’s recovery gains. In its monthly report, the Conference Board showed that the US-China trade war had virtually no impact on the consumer sentiment in August with the headline Consumer Confidence Index easing slightly to 135.1 from 135.8 but surpassing analysts’ estimate of 129.5. Underlying details of the report revealed that consumers’ 1-year inflation expectations rose to 5% from July's 4.6% and the Present Situation Index jumped to 177.2 from 170.9.
Additionally, Richmond Fed Manufacturing Index in August improved to 1 in August from -12 and beat the market expectation of -4. Finally, the Federal Housing Finance Agency’s (FHFA Housing Price Index came in at +0.2 in June to match May’s reading.
Despite these data, the US Treasury bond yields fell sharply on Tuesday. The 30-year T-bond yield dropped below the 3-month T-bond yield for the first time in nearly 12 years and revived concerns over a possible recession in the US.
Euro – European Markets
On Tuesday, Germany’s Destatis announced that the German economy contracted by 0.1% on a quarterly basis in the second quarter and the annual growth rate remained unchanged at 0% as expected. However, the fact that these readings had been already priced in for some time allowed the shared currency to ignore them.
In a prepared speech, European Central Bank (ECB) Vice President Luis de Guindos said that the ECB's monetary policy was data-dependent rather than market-dependent. "There is a tight two-way relationship between central banks and financial markets," De Guindos argued. "It is important for us to get the market view about where the economy stands, and where it is heading." While responding to a question about the bank’s potential use of negative interest rates following his speech, "The ECB has to act with determination," De Guindos said to make it difficult for the euro to gain traction.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Wednesday.
US: Richmond Fed President Barkin and San Francisco Fed President Daly will be delivering speeches.
EU: The ECB will release private loans and M3 money supply data on Wednesday, which are unlikely to have a significant impact on the euro. Markets will also be paying close attention to the GfK Consumer Confidence Survey from Germany.