German Chancellor Angela Merkel was in charge of sterling price action yesterday, as the pound rallied dramatically in the afternoon on headlines that referenced comments on a “practical” solution to Brexit. Sterling enjoyed a knee-jerk rally of the sort usually seen in emerging market currencies trading on headlines relating to IMF bailouts, political reforms etc. The detail of Merkel’s comments was less encouraging; what she actually said was that “The moment we have a practical arrangement on how to preserve the Good Friday agreement and at the same time define the borders of the (European Union’s) internal market, we would not need the backstop anymore”. The rest of the day’s Brexit noise consisted of the EU rejecting Boris Johnson’s demands for the rejection of the Irish backstop. Sterling is trading broadly unchanged compared to yesterday morning as of the time of writing. Today will see Boris Johnson and Angela Merkel meet in Berlin at around 5pm. The chances of a breakthrough seem slim, but given Boris yesterday hinted at Britain being willing to make “commitments”, and Merkel said that the Irish backstop could be bypassed by a practical solution, there is at least a glimmer of hope for good news today.


Italy’s government collapsed yesterday, causing the single currency to weaken by almost one quarter of a percentage point from the day’s high against the US dollar, pressing EURUSD towards the two year lows seen earlier this month. Guiseppe Conte resigned as Italy’s Prime Minister, accusing interior minister Matteo Salvini of his coalition partner party, the League, of weakening the country with calls for an election. By resigning, Conte rendered a likely confidence vote unnecessary. If a new government cannot be formed with existing parliamentary arithmetic, Italy will head to the polls. The sustainability of Italy’s fiscal plans remains key for the euro, so an election that leads to a less fiscally conservative government could plausibly see the single currency weaken.


The greenback reached a three-week high as measured by the DXY index of major currencies yesterday, while broader measures of the US dollar approached multi decade or multi year highs. The move was largely a continuation of the general theme of dollar strength, helped along by continued weakness in sterling, euro, and some EM currencies. US newsflow remained largely devoid of market relevant news but rich in entertainment value, as Donald Trump cancelled a meeting with the Prime Minister of longstanding US ally and NATO member Denmark, over a refusal to discuss the sale of Greenland. Today at 19:00 BST, minutes from the Federal Open Market Committee’s latest meeting will be released.


After a steady run of declines in July and a volatile start to the month in August, the loonie has managed to avoid further weakness, and posted a very small rally yesterday. Inflation data will be released at 13:30 BST, and offers high potential for loonie volatility given the data-dependent state of BOC policy. Later in the afternoon at 15:30, US Crude Oil Inventory data will be released.



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