Sterling is trading lower this morning, suggesting financial markets are taking yesterday’s relatively friendly conference between Boris Johnson and Angela Merkel with a very large pinch of salt. Nonetheless, faint glimmers of hope for a Brexit deal emerged from Berlin yesterday as Angela Merkel told Boris Johnson he had 30 days to find a workable solution to the Irish border to prevent a no-deal Brexit. All of the constraints that applied to Theresa May’s failed attempt to get a deal through parliament seem to still apply, suggesting that the next 30 days will be a rocky ride at best for sterling, or yet another cliff jump at worst. Boris is in Paris today, where he is likely to receive a similarly polite but uncompromising reception, and enjoy lunch with French President Emmanuel Macron. Macron recently responded to Johnson’s letter to EU leaders by saying “This renegotiation on the terms proposed by the British is not an option that exists”.


Would you like to have a glass of wine with that? Today’s European session will be dominated by political meetings in two countries that are famous for their extraordinary wines; Italy and France. After the collapse of the Italian government on Tuesday Italian President and kingmaker Sergio Matarella will meet with Italian parties throughout the day to explore the possibilities to form a coalition for a caretaker government. While the Sangiovese is served in Rome, the Bordeaux may flow in Paris where French President Emmanuel Macron receives British Prime Minister Boris Johnson to ruin a good wine with some nasty Brexit discussions. After German Chancellor Angela Merkel poured Johnson a glass of optimism by granting the British PM 30 days to come up with a viable alternative to the backstop, Merkel’s serving was later mercilessly swept off the table by an official of Macron’s office. This official remarked that a no-deal scenario is still France’s base case. Throughout the morning Flash Purchasing Manager Indices for several individual Eurozone countries will be released, culminating into a Eurozone wide reading at 9:00 BST. So far both the French and the German Manufacturing reading have surprised to the upside with a level of 51.0 (49.5 forecasted) and 43.6 (43.0 expected) respectively. Nothing impressive as of yet, but at least a hint of stabilisation in the recent fall in activity in Eurozone’s haunted manufacturing industry.


The dollar remains reasonably well bid this morning, as last night’s meeting minutes from the Federal Open Market Committee seemed to largely confirm Jerome Powell’s previous description of the Fed’s current rate cut mini-cycle as an “adjustment” and not a wholesale move to monetary easing. Member opinion seemed split on many points, however. Most agreed that the July rate cut was a “mid-cycle adjustment”, while a couple of members were in favour of a larger, 50bp cut. Kansas Fed President Esther George and Boston Fed President Eric Rosengren voted against a rate cut altogether. Market pricing suggests investors are now expecting a less aggressive series of cuts compared to earlier in the month, although a full 100 basis points of cuts remain priced in by Q3 2020. Today’s data calendar includes weekly Unemployment Claims at 13:30 BST, followed by Markit PMIs at 14:45 and the Conference Board’s Leading Index at 15:30.


A day of polar dominance ensued in FX yesterday, as the loonie completed the top three performers behind the most Nordic Scandies; SEK and NOK. A gust of risk-on sentiment blew over currency markets as AUD was well in the green as well, while the traditional havens CHF and JPY dangled at the bottom of the G10 FX board. July’s inflation data for Canada came in hotter than expected, with headline CPI rising 0.5% vs -0.2% previous and a median forecast of 0.2%. This leaves headline year on year CPI up 2%: bang on the Bank of Canada’s target. The BoC will not change policy on one data point, but with July’s wage growth figures also coming in hot (4.5% yoy), the current state of data flow is likely to give the central bank room to avoid following the RBA and RBNZ into cuts at its September meeting.


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