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Deal or no-deal

​​​​​​Today's news headlines:

  • ‘China's surplus with trading partners falls into balance'. According to the International Monetary Fund (IMF), China's current account surplus has dropped close to zero, indicating economic balance with the rest of the world. The surplus reduction by 1.0% year-on-year indicates China is moving towards more consumption-driven growth instead of historical export-driven growth. (Financial Times)
  • ‘EU is "unimpressed" by threats of no-deal Brexit'. The EU's chief negotiator, Michel Barnier, said that the UK would have to face the consequences if it chose to leave the bloc without a deal. In an interview published today, he said that the withdrawal agreement was the only way to leave the EU in an orderly manner and that it's not useful to bring threats of a no-deal to the negotiating table. (Reuters)

How much lower?

A looming Brexit deadline combined with the slim prospect of an agreement being reached has increased the market’s expectation of Sterling volatility. For many months, Brexit has been the main driver of the Pound, and the currency’s outlook continues to be binary. The overriding expectation is that Sterling will significantly appreciate if a Brexit deal is agreed. Alternatively, if the UK leaves the EU without an agreement, no one really knows how low the Pound could sink. Yesterday, Brexit Secretary Stephen Barclay conceded that a no-deal scenario is under-priced.

The October deadline is now just shy of three months away. The UK has not found a new Prime Minister yet, and both candidates have not ruled out the no-deal Brexit scenario. The result has been all-time lows for the trade-weighted Sterling Index and a spike in expected volatility. Given the perilous Brexit situation, further losses for the Pound in the coming months can't be ruled out. The incentive to hedge against adverse movements has arguably never been higher, but the jump in implied volatility means it’s becoming increasingly expensive to protect against downside risks.


The trade-weighted Dollar Index lost some footing around the London close yesterday, bringing the currency pair higher. Earlier in the day, Sterling had stumbled to its lowest level against the Dollar since April 2017. Risk aversion has continued to weigh on the Dollar this morning as the 50-day moving average looks to cross both the 100 and 200-day moving averages.


A positive reading in UK inflation failed to provide any significant support for Sterling as the pair sits nearly 6.0% lower than the highs of early May. Euro strength is limited by expectations that the European Central Bank will lower interest rates as early as next week, meaning the downward trend in the pair is beginning to flatten out.


Falling US Treasury yields prompted a Dollar sell-off, as the pair trended slightly higher in yesterday's and this morning's session. Yesterday, the IMF noted that the Greenback was overvalued by 6–12% based on near-term fundamentals, so a moderate correction in the Dollar Index may be due. US Philly Fed Manufacturing data is due later; markets will be keen to see if the figure reflects the recent rebound in the sector.