News & Analysis


With the dollar softening and recession fears abating throughout yesterday’s session, the pound rallied along with other higher-beta currencies. Notching a gain of 0.6% on the day against the dollar, and a similar rally against the euro, momentum in the pound remains unfettered by political developments. Last night, both Tory leadership contenders Rishi Sunak and Liz Truss faced off on the only live televised debate, which largely focused on the few differences in political agendas. The main dividing point is economic policies, which when raised saw Sunak slam the logic of Truss’s broad tax cuts – a policy that is also negatively viewed by market participants. While Sunak edged the televised debate according to a snap poll conducted by Opinium, his gains are unlikely to close the chasm he experiences in polls of the Tory membership. This was highlighted by the post-debate poll too, which saw Truss remain the favourite of the Conservative base while Sunak picked up more traditional Labour voters. In response to yesterday’s debate, one senior Tory summarised it best by saying “if you put it to the country, Rishi would win it – but if you put it to members, it’s Truss.” Until the race gets closer to installing a new Prime Minister and their economic policies become more likely to be enacted, GBP traders are likely to pay little attention to the political noise. Today, focus instead will be on preliminary data on the consumer outlook with the CBI retailing report for July due out at 11:00 BST.


Price action in the euro remained volatile yesterday despite the single currency closing relatively flat on the day. In the morning session, a hangover from Friday’s US PMIs spurred broad dollar strength as recession fears dominated, weighing on the euro in response. During which point, ECB members Kazaks and Holzmann outlined that the ECB’s front-loaded hiking cycle will likely see another 50 basis point hike in September, even if the economy shows signs of heading into a recession. However, the market risk-off narrative soon dissipated as the European session advanced. At which point, the euro surged along with most G10 currencies until news that Russia would restrict gas flows yet again sent the single currency trading back to flat on the day. At around 15:30 BST, Gazprom announced that it would need to take one more engine offline for maintenance repairs as of Wednesday, leaving just one turbine operating. This would see gas flows cut to around 20% capacity, a level that if sustained would see Germany miss the required inventory level for Winter. The turbine that was previously stuck in Montreal due to Russian sanctions is now stuck in Germany as it awaits import documentation from Gazprom before it can be delivered. Should the paperwork clear, Russian gas flows could return to pre-maintenance levels, i.e. 40% capacity that would see inventory levels reached. However, commentary from the EU this morning suggests that this is political posturing from Russia with EU energy chief Simson saying there is no technical reason for Russia to cut flows further. Should this persist, energy rationing is undoubtedly set to take place in mainland Europe, weighing on economic growth and euro assets. For now, however, the single currency is yet to reflect the worst-case scenario for gas supplies, that is a structural break below parity against the dollar. Today, all eyes will be on an emergency meeting by EU energy ministers. All 27 ministers will wrangle over forcing the implementation of the European Commission’s 15% consumption cut through the winter, or a similar policy.


After initially being buoyed by renewed recession fears overnight, the dollar’s strength was faded by European traders in what was a relatively light data session. A flattening in the US Treasury curve, which remains inverted, helped boost risk assets. US equity benchmarks besides the tech heavy NASDAQ index posted gains on the day, while commodity currencies in the G10 led gains against the greenback. In the equity space, Walmart compounded signs of a weaker consumer demand outlook from July’s preliminary services PMI yesterday as it slashed its profit outlook again, citing how inflation and tighter monetary policy is impacting demand. As mentioned in yesterday’s report, these dynamics will be welcomed by the Federal Reserve who are actively trying to cool domestic demand in order to quell inflation. With markets focusing heavily on Wednesday’s FOMC meeting, volatility in dollar crosses is likely to be limited today despite the release of consumer and housing data.


After faltering early on in yesterday’s session, the Canadian dollar soon rallied with other commodity currencies as oil benchmarks reversed early losses and equity futures flipped to trade higher before cash open. Focus for the loonie will remain on broad risk conditions today along with developments in European energy markets, although volatility may dry up as traders position themselves ahead of tomorrow’s Fed meeting.



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