For all the political and geopolitical noise in the past 48 hours the EUR/USD and GBP/USD crosses have been pretty stable around 1.29 and 1.155-1.16, respectively. Sterling appears to have got some support from comments by British Brexit Secretary Dominic Raab that he was confident that the UK and EU could reach an agreement on a post-Brexit deal by the EU Summit on 18-19 October. This is a very ambitious timeline and the British government is still hedging itself in the event of a no-deal. It is due to publish today the first batch of the 84 “technical notices” which aim to prepare the government, businesses and households in the event of the UK leaving the EU on 29th March without a deal in place.
The Dollar still managed to make small gains in trade weighted terms despite markets not reacting much to the release of the Federal Reserve’s minutes for its August policy meeting in which it left the door wide open to a September rate hike. Dollar support partly stemmed from a weaker Chinese Renminbi and Australian Dollar. Investors pushed the USD/CNY cross higher overnight after US and Chinese tariffs of 25% on $32bn of imports between the two countries kicked in one minute after midnight. Trade negotiations between the US and China will resume today but there appears to be little optimism that the deadlock will be breached.
The Australian Dollar posted the biggest overnight loss among developed currencies as pressure continues to mount on Prime Minister Turnbull. He survived an internal leadership vote on Tuesday but since then three cabinet members have resigned and given their support to Peter Dutton, the former home affairs minister who is vying to take over the leadership of the ruling party and the premiership. Weakness in the Australian Dollar has party spread to the Kiwi Dollar, with NZD/USD erasing two days of gains.
Markets today may at least temporarily redirect their attention to the Eurozone, with the Composite PMI for August and European Central Bank policy meeting minutes to be released. The ECB is unlikely to have changed its tone much and is still on course to start cutting its bond purchases as of October. However, the minutes will likely again re-emphasise the risks posed to Eurozone growth from the escalating US-China trade war.
The (preliminary estimate) of the Eurozone Composite PMI, a leading indicator for the manufacturing and services sector which closely tracks Eurozone GDP growth, was broadly unchanged in August at 54.4 after having dropped from 54.9 in June and a multi-year high of 58.8 in February. This should provide some welcome relief to the ECB after Eurozone GDP growth slowed to 2.2% yoy in Q2 from 2.5% yoy in Q1.
