Sterling reached a fresh 23 month low against the euro yesterday, as the single currency benefitted from its perhaps dubious status as a safe haven, a status that older market observers may remember sterling enjoying a long time ago. There was a myriad of Brexit headlines, mostly speculative, that had little immediate market impact and added little new meaningful information for sterling. No headline UK data was released and none are scheduled for today.


The US dollar popped its head above the parapet yesterday with the DXY index rallying for the first time in 3 trading sessions. The stimulus came from Fed speaker Bullard in Washington who claimed that the Fed cannot react ‘tit-for-tat’ to trade tensions. The President of the St Louis Fed struck further hawkish tones suggesting that the Fed has already adjusted for trade tensions, but didn’t rule out a further cut this year. In the market’s eyes, a cut in September is seen as a done deal, so took Bullard’s commentary as a hawkish move. Meanwhile, news leaked out that Donald Trump was committed to negotiations with Beijing despite the recent elevation in both tariffs and tensions. Top economic aide to the UK, Larry Kudlow, told CNBC on Tuesday that the Trump administration wanted to continue talks with China and that the president could adopt a flexible approach. There is little USD data on the calendar this morning, with only housing data out at 12:00 BST and Fed member Evans speaking at 14:30 BST.


The euro saw some two-way volatility against the US dollar yesterday, strengthening in the morning on haven demand before paring back its gains. EURUSD is currently trading broadly unchanged compared to yesterday’s open. In a general sense, the increased tensions between the US and China appear to continue to offer support for the euro, despite the serious economic risks that a slowdown in the Chinese economy poses for Europe’s. Yesterday’s data included German Factory Orders, which rose 2.5% in June after a sharp contraction in May. This morning’s released included a miss for Spanish Inflation, which nonetheless printed at a decent 2.1% year on year in July, and German Industrial Production, which contracted a whopping 5.2% year on year in June, a substantial worsening from the 3.7% contraction seen in May. The slowdown in the Eurozone’s biggest economy’s manufacturing and industrial sectors highlights the sensitivity of the Eurozone as a whole – and the increased risks presented by the prospect of another slowdown in global growth due to US-China tensions.


After resisting further weakness to the US dollar for the previous three sessions, the loonie is once again on the defensive and weakened more than half a percentage point overnight. A fresh drop in crude oil prices was the most immediate cause: WTI spot prices fell by almost $3 over the course of the afternoon and evening, with the loonie following close behind. The Brent crude benchmark closed yesterday’s US session down 21% from April’s high, meeting the normal definition of a bear market. The drop in crude prices due to fears of slumping demand will remain a persistent theme as global data continues to surprise to the downside – especially in manufacturing and industrial subsectors. Today, the Department of Energy will release its weekly inventory data at 15:30 BST.

FX Elsewhere

The New Zealand dollar is down some 2.7% against the US dollar and suffered against its Australian counterpart after the Reserve Bank of New Zealand surprised markets with a bumper 50 basis point rate cut. House prices are falling in NZ, and business sentiment is weakening, so a 25 basis point was widely expected by markets despite GDP growth holding at a solid 2.5% year on year in Q1 and an unemployment rate of only 3.9%. The bumper 50 basis point cut was probably influenced by the increased risks to global growth following the latest worsening in US-China relations. Should global growth worsen, as a result, the RBNZ and RBA are likely to continue easing before the end of the year.