News & analysis


Broad US dollar weakness sent sterling on its way yesterday with the pound carving fresh 5-week highs, however, the highs were seemingly unsustainable. As expected, politics and UK media focused on developments inside the Supreme Court yesterday, with no announcement likely until tomorrow afternoon. This morning, sterling was on the back foot as European Commission President, Jean-Claude Juncker, updated the European Commission on talks with UK Prime Minister Boris Johnson. Juncker stated that talks were friendly and constructive but that a credible no-deal risk remains on the table. On the data front, August’s CPI report is released at 09:30 BST, with moderation in inflation expected to 1.9%.


The euro reversed Monday’s losses yesterday as a shortage of US dollar liquidity propped the euro up due to the high premium in swap markets. An injection by the New York Fed prompted a sharp US dollar sell-off, helping the euro gain some more ground. Overnight, news hit that Spain will be heading back to the polls for the fourth time in four years after King Felipe said he had found no candidate to form a government as acting Prime Minister Pedro Sanchez’s lead fell 123MPs short of a working majority. Following on from comments from the ECB economist Philip Lane, Bank of France Governor Villeroy de Galhau said there is no reason for the ECB to change its inflation target at an upcoming strategic review. Many have been calling for an inflation target review as the ECB has continuously failed to reach the inflation target over the years. Political volatility in Spain and Italy have failed to move the single currency and European bonds this morning, but the single currency did marginally sell-off on the news that European car sales fell dramatically.  Today, the data calendar holds August’s inflation data, with CPI expected to stay at 1.0% on a harmonized level, and the Federal Reserve meeting tonight. Also, the ECB’s Guindos speaks in Madrid at 11:50 BST.


The US dollar had a torrid day yesterday as news began to hit that liquidity in short-term US borrowing markets was drying up. The overnight repurchase agreement market, which is used by banks and other financial institutions to fund their short-term liquidity needs by offering collateral in the form of US treasuries and other general assets, was the focus as rates surged to well above the Federal Funds rate. A surplus of US treasuries and a relative scarcity of cash reserves was the most likely cause, but it remains unclear if this was due to transitory disruptions due to tax payments and treasury issuance, for example, or a more fundamental problem such as excessive tightness in front end US liquidity. Worryingly for the Federal Reserve, the disruption in repo markets also dragged the effective Federal Funds rate up to 2.25% on Monday – the upper bound set by the Federal Open Market Committee. With the Fed’s credibility under threat, the New York Fed stepped in with a large repo operation aimed at injecting liquidity into the market – a step that was common decades ago but unheard of in the QE era. Some $53 billion of the operation was snapped up by the Fed’s primary counterparties, with the operation scheduled to be repeated today. The rate drama places severe pressure on the Federal Open Market Committee, which will announce an updated Federal Funds target range tonight at 19:00 BST. Although one 25 basis point rate cut was universally expected well before this week’s drama, there is some risk of a larger 50 basis point cut, a pause in the Fed’s current reduction in its balance sheet, or a dovish revision in forward guidance. In particular, the “dot plot” projections of FOMC members expectations of interest rates for the next year are one possible focus for a dovish surprise tonight, as the last set of projections featured no calls for rate cuts far below 2%. In a dramatic day, the USD fun didn’t stop there. President Trump released statements last night that a US-China trade deal could come to fruition prior to the 2020 election, or even “a day after”.


The loonie sold off throughout yesterday’s trading session as oil markets began to reverse recent gains. News from Saudi Arabia that production would resume to full capacity at the end of the month led to WTI crude falling back towards the $59 mark – a $3 drop. However, the loonies losses were stemmed as the US dollar began to sell-off broadly later on in the session. Ultimately, the Canadian dollar ended the trading session relatively flat. Today, August’s CPI data is released at 13:30 BST, with the average core measure expected to hold around the 2% mark. The Federal Reserve and its actions tonight puts the prospect of an insurance rate cut by the Bank of Canada back on the table.