Global Themes

UK politics back in spotlight
- No-deal Brexit plan due today
- Tough week for Turkey
- Dollar demand dips
- Tipping point for the Euro

GBP

No-deal Brexit plan due today
Both GBP/USD and GBP/EUR find themselves higher this morning with $1.2730 and €1.1180 touched respectively. The GBP/USD currency pair has finally seen an end to the relentless selling pressure endured over the past 12 trading days. The pullback should not come as a surprise as the selloff endured has been relatively aggressive and markets were bound to see some profit taking at some point. The move higher has not been driven by Sterling positive sentiment so a recovery to $1.30 is unlikely and we could expect short term resistance up at the $1.2774 mark based on the recent trading patterns. GBP/EUR reverts to the standard minimalistic trading range we have come to expect of this pair over the past year. Though it has trended generally lower, we seem to have found a floor at the €1.1070 mark but also seem to be struggling to hold gains above the €1.12 mark.

Today a ‘no deal’ Brexit plan will be published, which will outline the UK government’s plan should the UK and the European Union fail to agree a deal before March 2019. The plan will be published on more than 80 documents providing a variety of plans for different industries and sectors. It certainly shows how serious the government is taking the possibility of a no-deal scenario, which will ultimately shock the pound should such a scenario take place.

If this plan isn’t bullet proof, confidence in Prime Minister Theresa May could be challenged and the future of the UK economy would appear very murky, which could spur further selling of Sterling and drive GBP even lower.

Turkey

Tough week for Turkey
It has been a tumultuous week on financial markets following Turkey’s currency crisis and the ripple effect it has had across other currencies, commodities and equities. The Turkish Lira had plunged by more than 40% since the beginning of the year until a pledge by Qatar to invest in Turkey’s financial sector helped stabilise the freefall. The Turkish central bank also made it harder for speculators to “short” the currency, in layman’s terms this means to bet on the Lira falling further. This gave TRY some respite and it rallied around 4% against the dollar yesterday. Finance minister Berat Albayrak also held an encouraging conference call to thousands of investors who were concerned a trade war with the US would force Turkey to seek a bailout from the International Monetary Fund.

Turkey’s economic woes are far from out the woods though, and today the Lira is suffering again as the US have warned more sanctions could be expected. Investors will also be keeping a close eye on Standard & Poor’s sovereign credit rating report on Turkey later today. This could spark further volatility considering the agency downgraded Turkey’s rating in May.

USD

Dollar demand dips
The US Dollar index, which measures the strength of the dollar against a basket of currencies, continues to fall away from the 13-month highs, just shy of the 97 handle that was clocked on Wednesday. The strengthening of the dollar earlier in the week was a result of safe-haven, high yielding appeal amidst the risky market environment following Turkey’s economic turmoil. A robust US economy met with continued interest rate rises by the Federal Reserve has boosted demand for the dollar this year. With the US imposing tariffs on China, Europe and Turkey recently, this has led to further strengthening of the dollar over the last few months, which has seen CNH fall to near record lows against the USD and EUR/USD depreciating nearly 10% since February this year from $1.2550 to as low as $1.1297 on Wednesday.

The dollar index is on route to giving up most of its weekly gains though, as market participants are calmed by hopes that next week’s talks between the US and China will help to avoid a full-blown trade war. The index gyrates around the mid 96 zone this morning and EUR/USD continues its efforts to recapture the $1.14 level.

The US economic calendar is sparse today, but Canadian inflation will headline from across the pond. At 1:30pm Canada’s consumer price index for the month of July is expected unchanged at 2.5% growth y/y and 0.1% m/m. However, a surprise to the upside could help support what has been a tough time for the CAD due to falling oil prices.

EUR

Tipping point for the Euro
This morning the Euro sits perched just below the $1.14 level against the US Dollar and slightly adrift of €1.12 against Sterling. Today, inflation data for the Eurozone will be released at 10:00am and this could be a pivotal tipping point for the single currency. A stronger than expected inflation print could see the EUR/USD continue its recovery from a 14-month low of sub-€1.13 earlier in the week.

Inflation for the month of July is expected to be 2.1% y/y, the same as the previous month’s print, and core inflation is also expected to remain flat at 1.1% y/y. If inflation falls below expectation, EUR/USD could drop back towards $1.13 and potentially allow GBP/EUR another run at taking the €1.12 handle before the week is out.




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