Sterling enjoyed a small rally yesterday, as Boris Johnson assumed power and went through the process of sacking and appointing cabinet ministers. The tone of the Cabinet appointments was, unsurprisingly, Brexiteery with a nod to technocratic competence and Tory unity. The new Prime Minister did give a speech, but refrained from offering much detail on his Brexit strategy apart from promising to negotiate a new deal and leave the EU on the 31st of October. Domestic spending promises also featured prominently in the speech, including police and health and social care. Boris’s Brexit strategy and market perceptions of his chances of success remain critical for sterling. If the new Prime Minister is perceived as having a good chance of passing a deal through Parliament the pound has good prospects for a sharp rally, as last year’s trip above the 1.40 level on GBPUSD proved. The opposite scenario where a no-deal Brexit looks more likely, will, of course, lead to further sterling downside. However the FX risks of the two scenarios may not be symmetrical – positioning data on sterling shows leveraged speculative positions solidly net short on the pound, suggesting that any upside surprises from Boris have the potential to prompt a rapid sterling rally.


A two-year low on EURUSD approaches as the European Central Bank meeting of this afternoon nears, while the euro actually held surprisingly well yesterday after dramatic German manufacturing survey data. The Flash July German Manufacturing Purchasing Manager’s Index made an absolute crater as it came in at 43.1, the lowest point in seven years, signalling a sharp contraction in manufacturing economic activity. What may be even more worrisome is that the Services sector, despite a higher current activity, has confidence about future conditions at a three and a half year low. This suggests the weakness of the manufacturing sector may indeed be spilling over into the services sector. The Services sector is around three times larger than the the manufacturing sector in the Eurozone, which explains why the bloc still shows moderate growth despite a contraction in the manufacturing industry. However, if the services sector gets contaminated, a Eurozone recession is a certainty which also means all bets are off about how much more accommodative ECB policies may become. Overnight Interest Swap markets currently price in a chance of 37% the ECB will already cut today, while many analysts expect the ECB to hold off until fresh macroeconomic projections are available in September. Given the ECB is about to change the direction of its policies, today’s Rate Announcement at 12:45 BST and Press Conference at 13:30 may bring quite the volatility on EUR crosses.


The greenback remained in the middle of the board of major currencies yesterday as headline PMI data improved but could not conceal some worrying details in the survey. The July Markit Flash Manufacturing PMI dropped to the Neutral level of 50 as producers are starting to feel the pinch of the trade war, while resilience in consumer spending lifted the score in the Services PMI to 52.2. The composite reading came out at a three-month high at 51.6, which is an improvement from the three-year lows seen in May, although it still only points to minor growth in the private sector. The ominous details are nevertheless present throughout the report, with for example the reduction in output in the goods-producing sector being marginal, but yet at almost a decade low. Also, the rate of job creation in the private sector slowed to the slowest pace in 27-months, pointing to monthly private-sector job growth of only 130.000 where 200.000 is the recent trend. Finally, inflationary pressures continued to remain subdued with services providers even reporting price cuts in July. If the Federal Reserve’s narrative is to proactively cut interest rates before the state of the economy deteriorates, then this PMI report indeed offers a myriad of justification for doing so on the 31st of July. Core Durable Goods Orders this afternoon at 13:30 BST will be an interesting yardstick to see whether business are still confident enough in the future to make fixed business asset investments.


The lack of Canadian data coming out for the rest of the month keeps the loonie stuck in the Summer doldrums as the coinage is dependent on developments elsewhere to blow some wind in its sails. This week brought unrests in the Strait of Hormuz between the UK and Iran which normally would increase concerns about the oil supply. However, as it coincided with doubts about the firmness of global demand, oil price movements remained viscous as well, which means CAD continues to trade close to 8-month highs against USD for now.