Post date: 02/09/2019 14:55

While there was no single catalyst to explain the general rally in financial markets last week, investors were encouraged by the absence of bad news, particularly in the trade war between China and the US. The dollar benefited the most among G10 currencies, ending the week at the top of the table, helped along by more negative news out of the Eurozone. Most major emerging market currencies also fell against the dollar. This week offers two distinct sources of currency volatility. In the US, the payroll report for August out Friday will be followed by a speech by the Federal Reserve Chair Powell. In the UK, we will see Parliament reaction to Prime Minister Johnson’s attempt to shunt it aside during the Brexit negotiations.


Boris Johnson’s attempt to shut down Parliament for most of September and October will be tested as early as Tuesday by a Labour vote to rule out a no-deal Brexit. These manoeuvres reaffirm our view that there will be no Brexit without a general election. It is notable that the odds for a no-deal Brexit priced in by betting markets have increased only modestly after Johnson’s controversial manoeuvre – from 35% to just over 40%. The PMI indices of business activity will provide a timely read of Brexit’s impact on business confidence, but these releases will probably be overshadowed by the headlines and vote counts coming in from the British Parliament this week.


News flow out of the Eurozone does not seem to be improving. Last week we received yet another disappointing inflation number for August, with core inflation (excluding the more volatile components) back down to 0.9% and nowhere near exhibiting a trend towards the ECB target of close to, but below 2%. This week will be a news-light transition week before the critical ECB meeting on 12th September, and we expect the euro to trade mostly sideways against its major peers.


A week of second-tier economic releases out of the US did little to clarify the situation for the Federal Reserve. We did at least have no further deterioration of the US-China trade relationship, and the Trump administration continues to demur about the possibility of intervention to weaken the US dollar, which dollar bulls took as an encouragement. This Friday’s payroll release is the last one before the Fed meeting in September. We think that these reports are going to become increasingly critical in the next few months in terms of driving Federal Reserve policy, so we expect to see some volatility as the market digests its contents on Friday afternoon.