Sterling remains in dire straits as it lost ground again against USD and EUR yesterday and fails to put much distance between itself and 2-year lows on GBPUSD and GBPEUR seen in the recent week. House Prices proved unsupportive yesterday, with Halifax reporting prices fell for the second month in a row in July as economic uncertainty has markets treading water. Shadow Chancellor John McDonell revealed the Labour Party’s latest cunning plan to send Jeremy Corbyn “in a cab” to the Queen Mother if Boris Johnson were to lose a vote of no confidence while refusing to step down as a consequence. The message Corbyn would bring to the Queen would be that he stands ready to assume power, a move that would drag the Queen into a constitutional crisis and is labelled as a coup attempt by some. The remarks were made at the Edinburgh Fringe Festival, which makes some hope McDonell’s words were simply in jest because a constitutional crisis is unlikely to benefit the Great British Pound at the moment. Today’s data calendar is empty, which leaves market participants with every opportunity to have their full and undivided attention ready for Friday’s First Q2 Gross Domestic Product reading.


Tuesday and Wednesday form peculiar mirror images of each other on the EURUSD chart as Tuesday started with a bout of EUR strength followed by a dip, while Wednesday brought a soft euro in the morning that eventually rallied in the afternoon. The cause for euro’s dip in the morning can be sought in plummeting German Industrial Production, which fell by 1.5% in June, bringing the year-on-year rate to -5.2%, the worst reading since the great financial crisis in 2009. In response to this, recession signals began to turn alarmingly amber, with the German bond curve reaching its flattest state since the 2008 recession. Today at 9:00 BST the European Central Bank releases its Economic Bulletin, a document containing all the statistical data the ECB uses to justify its monetary policy decisions.


The US dollar continues to be the only game in town as global recession fears strike, although the DXY index fell marginally on the back of a strong yen move yesterday. Comments from Fed speaker Bullard were offset by the President of the Chicago Fed, Charles Evans, yesterday at a breakfast in Chicago. “You could take the view, as I have, that inflation alone would call for more accommodation than we put in place with just our last meeting”, Evans said. The market wasn’t shaken by the headlines, however, as it is already known where Evans casts his vote. Recent data and developments have almost secured another rate cut by the Fed in September. Markets are pricing a 100% probability of a cut, with expectations split with ⅔ of the probability distribution sitting on a 25 basis point cut and the remaining ⅓ suggesting a 50 basis point cut. Regarding the recession indicators, the 10 and 30-year yields fell towards the lowest levels of 2019, while gold futures rallied above $1,500 an ounce.


WTI oil prices retreated below the $62 mark yesterday, a signal that WTI followed Brent’s move from Monday in entering a technical bear market, and the slippery stuff continued to slide down to a fresh 7-month low of $50.52. The sell-off in oil came prior to the market moving Department of Energy inventory release, which showed a stark reversal of the recent trend of dwindling inventories as the built by 2.385m barrels in the first week of August, as the psychological level snapped. The dramatic $2.9 sell-off didn’t help oil sensitive currencies, with EURNOK hitting decade highs and the loonie touching lows not seen since the 19th June. Today, the mood has reversed a tad following a Bloomberg story that Saudi Arabia called other oil producers yesterday to discuss a possible policy response to oil prices sliding to a seven-month low. Falling global demand has weighed on crude thus far, and may eventually force OPEC to reduce supply even further. With WTI retracing some $1.73 this morning, the loonie and krone are beginning to claw back some of yesterday’s losses.

FX Elsewhere

In the Art of War the legendary commander Sun Tzu teaches that it’s OK to be confused in battle, as long as your moves confuse your opponents even more. This can be applicable to the People’s Bank of China daily yuan fix, which was set above 7.00 per dollar, the highest level since 2008, but lower than market pundits expected. This keeps markets guessing how comfortable the PBoC is with a weaker yuan, which for now supports our base case that the central bank is aiming for a gradual and managed weakening of the currency. It should be noted they attempted this before in 2015-2016, which didn’t work out overly well and eventually led China to be forced to leverage massive amounts of foreign reserves to calm markets. On the data front, China export growth showed a rebound in July, while imports showed no slowing of economic activity. This can be taken as a positive before the arrival of the fresh 10% US tariffs on $300 billion worth of Chinese exports, taking effect on the first of September.