GBP: Brexit risk only increasing

EUR: Quiet until Thursday

USD: Labor Day holiday

Sterling

A combination of thin markets and political headlines are taking the air out of sterling this morning as it slips against all of its major peers. The Labor Day holiday in the US lasts for 24hrs and therefore will have a negligible effect after today, the political headlines will last a lot longer.

As we move into the endgame of the Brexit trade negotiations with the EU we have to expect that headlines may become a little bit difficult to believe but the overnight news around the UK’s desire to override parts of the withdrawal agreement with new legislation are a particularly big rock that has been thrown into the EU pond.

Such a move would represent the UK reneging on a treaty with powers under international law a little under a year after signing it. Regardless of your political persuasion, any counterparty reneging on parts of an agreement does not make for confidence in free-and-frictionless trade.

Risks of a no-deal remain and we are confident that the market continues to underprice such pressures, a definitive reason for sterling weakness in the coming months.

Euro

The single currency is back in the 1.18 ranges as we wait on this week’s European Central Bank report that will see markets focus in on inflation expectations and whether further hints at easing are due given the strength of the single currency.

Until then we expect the euro to remain relatively quiet.

US Dollar

News from the US jobs market on Friday was positive with employment continuing to grow, albeit with a slowing pace of private sector gains. Data points from the US economy are showing that while the news since July has been strong, gains are starting to level out and that absent a substantial change in fiscal policy and/or good news on the vaccine then the US economy will struggle to return to pre-pandemic levels of output before 2022.

Dollar strength has returned following its weakening to 1.20 and 1.35 in EUR and GBP terms on the back of large falls in equity markets through the end of the week. We will be looking to the same place for further indications failing market sentiment, something that could continue the drive for a stronger USD.

Elsewhere

NZD has continued to weaken overnight following a reiteration from the local central bank that it very much has the ability and willingness to use negative interest rates as a policy tool in its plans to support the economy. The RBNZ is the latest central bank to countenance such a move with markets pricing in a cut below zero from April of next year.

Have a great day.