Sterling slumped for a fifth consecutive day against the dollar yesterday, its longest losing streak since May, as confidence in the pound is falling amid increased fears of a no-deal Brexit and a recall of coronavirus containment measures. UK Prime Minister Boris Johnson threatened to walk away with no-deal again yesterday, while officials stated they were ramping up preparations for a no-deal scenario as the deadline draws closer and the prospects of a deal fade. Ireland stepped up pressure on the UK PM, with Foreign Minister Simon Coveney telling parliament that a unilateral departure would be “a matter of considerable concern” and could “seriously erode” political trust in Northern Ireland. As for the virus, The UK will limit social gatherings to six people, down from 30, under new rules to be announced by Boris Johnson today. The new rules will be in effect from Monday onwards, as Britain has recently seen the largest coronavirus crackdown since lockdown measures were eased. This has only raised concerns over the path of the economic recovery, reflected in the level in which the pound trades at, as the prospect of a no-deal exit and a second wave rise.
This morning’s price action in the single currency added to yesterday’s losses against the dollar as EURUSD fell to a 2-week low. Traders returned after the US Labor Day holiday, leading to a pickup in US dollar demand, but the euro also remains depressed ahead of the European Central Bank meeting on Thursday and seemed unimpressed by the upward revision to second-quarter eurozone GDP. The updated GDP release printed at -11.8% QoQ compared to the preliminary -12.1% release, still reflecting an unprecedented quarterly contraction. Across the bloc, fears of a coronavirus resurgence are increasing again with France hitting a new peak and infections in Spain and Germany accelerating again. In an interview on France Inter radio on Tuesday, France’s Health Minister Olivier Veran referred to the resurgence in virus cases as “worrisome”, as increased testing doesn’t explain the jump in cases. However, French Prime Minister Jean Castex stated before that the country cannot afford another nationwide lockdown, favouring more targeted restrictions instead. As for today, EURUSD is likely to trade in a confined range in the absence of any significant economic data releases and ahead of the ECB monetary policy update tomorrow.
The dollar was trading in the green against most of its G10 peers except JPY and CHF yesterday as global risk sentiment took a hit after AstraZeneca delayed testing of a coronavirus vaccine. Also weighing on risk sentiment is the report that the US Customs and Border Protection officials have prepared orders to block imports of cotton and tomato products from China due to alleged forced labour, although a formal announcement has been delayed until later this week because of “scheduling issues”, according to Reuters. The import bans over the alleged forced-labour abuses would be an unprecedented move by the CBP and likely stoke renewed tensions between the two nations. It would therefore not be a total surprise if sanctions from Beijing would follow. With today being a light day on the economic calendar for the US, the greenback is expected to take cues from developments in market mood.
The Canadian dollar felt the pressure from a flailing oil market yesterday and fell over a percentage point against the dollar. The oil-induced depreciation witnessed in the Canadian dollar was substantially less than what was seen in the Norwegian krone, with the Brent-linked currency falling 2.24%. Concerns over the demand outlook for oil are elevated and poor Q2 GDP readings from both Japan and South Africa didn’t help. This resulted in WTI shedding over $2 from its price to fall back below the $37 level, while Brent also lost $2 to fall below $40 for the first time since mid-June. Falling US inventories could stem the bleed for crude markets, which continue to decline in this morning’s session. Today’s API data, which precedes the more watched DoE data released on Thursday, may provide enough to steady the proverbial oil ship when released at 21:30BST. While oil markets have flashed back into focus for the Canadian dollar, the recovery in the economy is also of concern. Consumer confidence data collected for last week showed the rebound in confidence stall at 52.7, as per the Bloomberg Nanos Consumer Confidence Index. While the economic rebound has been stronger than expected thus far, the Bank of Canada will likely brush this to one side in today’s meeting at 15:00BST/ 10:00ET. The road to recovery is expected to hit more resistance from this point as the fall and winter months increase the likelihood of a second wave. The central bank will be more than aware of this coming into today’s rate statement. We expect the Bank to reiterate its stance of keeping rates at the effective lower bound for some time while leaving the minimum purchases of C$5bn intact. The Bank is unlikely to pivot too much from its previous rate statement as the economy has tracked better than was expected in the July Monetary Policy Report, especially as there is no press conference scheduled after today’s meeting. With the loonie weakening recently, another potential risk to the recovery has eased for the central bank, giving them more reason to stand pat until further developments force their hand.