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Currency Market Analysis

Aug 23, 2019 | Currency Market Analysis

Global Themes

Pound up, Dollar down, Italian woes continue
- Sterling surges on Brexit hope
- Dollar slips ahead of Jackson Hole
- Italian political problems rumble on

GBP

Sterling surges on Brexit hope
The pound surged on Brexit hopes yesterday, gaining over 1% against both the euro and US dollar. Sterling spiked to one of its best daily gains in months, after traders backed the pound on comments from German Chancellor Angela Merkel. The Chancellor hinted that a solution to the Irish border problem could be found before Britain leaves the European Union on Oct. 31. Merkel said the UK could have until the Brexit deadline to find a compromise on the Irish backstop rather than a previously stated 30-days, effectively doubling the time for the UK to find a resolution (source: Reuters).

However, Brexit news wasn’t all rosy for the UK, Prime Minister Boris Johnson was told by French President Emmanuel Macron that they would "not find a new withdrawal agreement" that is "very different from the existing one". However, the existing withdrawal agreement "can be amended”. Providing a far tougher stance than Angela Merkel (source: Sky News).

Comments from the French PM were largely ignored and sterling moved back to key levels against the euro and US dollar. GBP/EUR broke back over the €1.10 level, while GBP/USD retraced back over the $1.22 level for the first time since late July.

USD

Dollar slips ahead of Jackson Hole
The US Dollar slipped on Thursday after US Manufacturing PMI data showed contraction for the first time since 2009. The dollar could continue to weaken ahead of the Federal Reserve (FED) Chair Jerome Powell’s address from the Jackson Hole Symposium at 3pm today. Investors have sold the dollar over concerns Powell may signal further rate cuts as a result of the worsening global economic outlook.

Wednesday’s Fed minutes saw policymakers divided on further rate cuts. Whilst some Fed members feel the US economy’s high employment levels and on target growth do not justify a cut. There is pressure from dissenting Fed members as well as Donald Trump and Wall Street to cut rates, in order to combat global trade headwinds, increase US competitiveness and prevent the US economy from slipping into recession. Yesterday’s manufacturing data and a recent inversion of the 2 and 10 year yield curve, which historically indicates an imminent recession, may influence the Fed and Powell.

EUR

Italian political problems rumble on
President Sergio Mattarella said several of Italy's parties had told him they needed more time to find an accord to solve an ongoing government crisis after former Prime Minster Giuseppe Conte resigned earlier this week. The parties will reconvene with the President next Tuesday to try and find a resolution. Mr Mattarella said dissolving parliament was a decision that should not be taken lightly.

Italian woes are keeping the euro near yearly lows against the US dollar as the pair trades below 1.11.


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