Sterling has been weakening against the US dollar since last Wednesday, but this has been more a story of broad US dollar strength than Brexit related sterling weakness. The pound has been broadly flat against the euro over this time period. This week is likely to see and end to end this period of relative political stability for sterling, with Parliament returning tomorrow and battle lines being drawn. The key question for the week will be if Opposition MPs and Conservative Rebels succeed in passing legislation that blocks no-deal Brexit, and what the Government’s response to such a development is. The risk of a no-deal Brexit remain the key issue for sterling – if the efforts of the so called “Rebel Alliance” manage to reduce the chances of no-deal, sterling is likely to rally. This morning’s main data release was the Manufacturing Purchasing Managers Index, which fell  further into contractionary territory at 47.4 in August. New work contracted at the fastest pace on record, while Business Optimism dropped to the lowest in history.


The euro saw yet another significant bout of weakness on Friday, reaching a fresh two year low against the US dollar as poor data and rising expectations of policy action from the European Central Bank meant the euro was in no position to resist the general dollar strength seen last week. The ECB’s meeting on the 12th of this month stands out as the most significant in years, with rate cuts and a tiered deposit rate all but assured and fresh asset purchases a possibility. This morning’s euro data has included broadly on-expectations Purchasing Managers Indices for the manufacturing sector, which showed severe declines in Germany. Later in the week, Services PMIS will be released on Wednesday alongside Retail Sales data for the eurozone as a whole.


With the US enjoying the Labour Day holiday today and Hurricane Dorian bearing own on the east coast, US news flow is likely to be relatively thin and narrowly focussed today, meaning the dollar may be left largely to its own devices. Traditionally US capital markets tend to heat up in September however, so the rest of the week has the potential to be eventful. The data calendar has plenty of events, including Manufacturing PMIs tomorrow, Non-Farm Payrolls on Friday, and a series of speeches from Fed policymakers beginning with Eric Rosengren on Tuesday. With the latest round of US-China tariffs coming into force, trade will remain a major risk this week, with further escalation likely to severely damage US consumers alongside the Chinese economy.


USDCAD reached fresh highs every single day last week, as Canadian data and general macro factors offered little impetus for a loonie rally. The Bank of Canada’s Wednesday meeting is therefore likely to be a watershed event for the loonie, as the Bank will have to signal if it is joining the tide of global central banks currently entering easing cycles. No change in policy is expected at this week’s meeting, and Canadian data on the whole does not scream “rate cut”. But with the Fed expected to ease further this month and other G10 central banks easing aggressively, the BoC is likely to err on the side of caution and acknowledge that worsening global factors may mean a cut is likely this year.



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