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Currency Market Analysis

Aug 20, 2019 | Currency Market Analysis

Global Themes

Brexit impasse drags Sterling lower
- Sterling subdued, driven by Brexit
- Italian politics takes centre stage
- Dollar demand swells, GBP/USD slips


Sterling subdued, driven by Brexit
Data-wise, the economic calendar is light across the board today as traders continue to monitor Brexit updates and US-China trade talks. The British Pound remains relatively subdued near $1.21 versus the US Dollar and €1.09 versus the Euro, still plagued by the uncertainty of UK politics and the Brexit outcome.

UK Prime Minister Boris Johnson maintains his view that the current Brexit deal will need to have the Irish backstop removed for it to be approved by Parliament. The Irish PM Leo Varadkar is also sticking firm though, reiterating the need for a legal guarantee to prevent a hard border on the island of Ireland. The UK and EU remain in deadlock, with both sides accepting a no-deal scenario as looking more likely now. Such an outcome is forecast to send GBP/USD towards $1.10 and GBP/EUR towards parity. However, if a no-deal scenario can be avoided, Sterling is expected to recover from its recent slump. Mr Johnson's plans to visit Berlin and Paris on Wednesday and Thursday respectively, before the G7 summit this weekend, where Brexit will no doubt be a hot topic.

Meanwhile, when Parliament return from summer recess on September 03, the Labour party hopes to bring down the government and form its own temporary emergency coalition in order to delay the Brexit deadline date once again and hold a general election. 


Italian politics takes centre stage
The salient event of today is in Italy where Prime Minister Giuseppe Conte faces a no confidence vote. If he loses, it remains to be seen whether a new coalition government will be formed, or else Italian President Sergio Mattarella could alternatively seek to form a caretaker government ahead of another general election. Volatility may ramp up as market jitters intensify amidst this political turmoil.

The relationship between Italy’s co-ruling parties has soured over recent weeks, forcing Matteo Salvini’s far-right League party to issue the motion of no confidence in the PM Conte. Today the vote will take place and threatens to further destabilise an already fragile political environment. The Euro could come under selling pressure as a result, sparking further downside risk in EUR/USD to test $1.10. Such a move could help GBP/USD take on the €1.10 level.

In addition to this political risk event, the Euro remains weaker amidst a backdrop of poor economic data from the Eurozone and particularly Germany. Investors are waiting on Thursday, where important PMI data will be released alongside the European Central Bank’s meeting minutes.


Dollar demand swells, GBP/USD slips
The US Dollar has started off the week stronger across the board. Boosted by talks of fresh monetary stimulus around the world, yields on US Treasuries have begun to recover. The dollar is rising with yields, dragging GBP/USD lower, but traders remain cautious ahead of the Jackson Hole symposium this Friday.

US President Donald Trump was back in the spotlight yesterday following more Twitter posts about the US Federal Reserve (Fed). The President believes a 100-basis point reduction in the current benchmark interest rate in a short period of time should help support the domestic and global economies. Market participants, now somewhat used to the impromptu Tweets, largely ignored the comments, as dollar demand continued to swell. However, will Fed Chair Jerome Powell acknowledge Mr Trump’s words and how might he respond at the Jackson Hole symposium later this week?

Further US rate cuts are already priced into market though, so if Mr Powell fails to deliver the dovish message which is anticipated, then the dollar could extend its recovery. EUR/USD may challenge the $1.10 downside support while GBP/USD could battle it out around $1.20.

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