Sterling Rises on Hopes of EU Softening Tone on Backstop
What’s been happening?
Pound Sterling – UK Markets
After spending the first half of the day under selling pressure, the British pound gathered strength and posted strong gains against both the dollar and the euro on Tuesday supported by hopes of the UK exiting out of the EU with a deal.
In a response to British Prime Minister Boris Johnson's letter to the EU clarifying the UK's stance on Brexit, the EU earlier in the day said that they regret the fact that the UK did not provide any concrete proposals that could be seen as alternative arrangements to replace the Irish backstop and repeated that they won’t be reopening the Withdrawal Agreement. The PM’s office quickly reacted to these remarks in a statement that reiterated that there wouldn’t be a prospect of a Brexit deal unless the EU was willing to renegotiate the Withdrawal Agreement. Although these headlines made it difficult for the pound sterling to find demand, German Chancellor Angela Merkel’s comments on the backstop issue revived hopes of the EU finding a way to make concessions without touching the Withdrawal Agreement.
Merkel argued the backstop was a question of the political declaration on future ties rather than the Withdrawal Agreement and said that they will think about practical solutions to the Irish backstop problem. "Britain needs to decide which way it goes, we have made our offer to work closely," Merkel added.
Meanwhile, the Confederation of British Industry (CBI) in its monthly Industrial Trends survey noted that the manufacturing output in the UK stabilised in three months to August. "Manufacturers expect output to remain broadly unchanged in the coming quarter, with 24% predicting growth, and 25% a decline, giving a balance of -1%," the CBI said in its press release.
US Dollar – US Markets
The greenback struggled to preserve its recovery momentum on Tuesday pressured by the falling US Treasury bond yields. Responding to the US decision to delay the ban on the Chinese telecom giant Huawei for 90 days while adding 46 new Huawei subsidiaries to the entity list, China’s Commerce Ministry said that they were dissatisfied with the US sanctions. The 10-year Treasury bond yield lost more than 2.5% on the day and US Dollar Index, which tracks the dollar’s value against a basket of six major currencies, snapped its five-day winning streak.
Later in the day, US President Trump repeated that he was not yet ready to make a deal with China and called upon the Fed to be ‘proactive’ and the interest rates. Trump further added that his administration was looking into tax cuts but these comments did little to nothing to help the dollar recover its losses.
Euro – European Markets
The euro rose modestly against the dollar but suffered losses vs the sterling on Tuesday. The data published by Germany’s Destatis showed that the Producer Price Index in July ticked down to 1.1% on a yearly basis as expected. Furthermore, the Eurostat announced that construction output remained unchanged in June following May’s 0.46% decline.
While addressing the Italian Senate amid the political turmoil later in the day, Italian Prime Minister Giuseppe Conte announced his resignation, calling League party's decision to present a no-confidence motion 'grave.' Conte further said that this development would prevent the budget from passing in time and noted that they may have to increase the VAT to counter that. "August political crisis paves the way for an autumn vote," Conte stated and added that Italy now risks facing financial instability.
What’s coming up?
UK: The UK’s Office for National Statistics will release the public sector borrowing figures on Wednesday.
US: The FOMC will publish the minutes of its August meeting. Existing home sales data will be featured in the US economic docket as well.
EU: There won’t be any macroeconomic data releases from the euro area on Wednesday.