Light data week set to leave the focus on politics

Today's news headlines:

  • ‘Brexit deal is 95% settled, UK’s May to tell Parliament’. However, the lucrative Irish border issue remains unresolved. (CNN)
  • ‘China announces new tax cuts to help boost spending as economic growth stalls’. New tax rules bid to save economy from slowdown. (Australian Business Insider)
  • ‘Warning signs in the housing market’. The housing market is raising serious red flags over the health of the US economy. (Bloomberg)
  • ‘Italy expects EU budget rejection on Tuesday: source’. European Commission slams unprecedented breach of fiscal rules. (Reuters)
  • ‘Theresa May told she has 72 hours to save her job’. Lack of Brexit progress raises the prospect of a no confidence vote in the PM. (Sky News)

Regardless of which direction you look, the focus today seems set to remain very much on politics. Whether it’s the UK’s lack of progress over Brexit, to Italy’s ongoing stand-off with the remainder of the Eurozone over the appropriateness of its budget, or the continually evolving position in the USA over foreign policy, currency markets may look generally becalmed right now. However, once we see a little more clarity emerge, then the general lack of momentum which has prevailed through the Asian session may well be replaced by some notable increases in volatility.

Economic data is relatively thin on the ground today, but the European Commission has requested clarification from Rome over its budget plans. Italy found itself on the receiving end of a credit downgrade on Friday night from ratings agency Moody’s, and now the new government must respond to the commission by midday regarding its deficit targets. Although the Commission has never taken such action before, this could be the first time it requests a member state revises its draft budgets. With Italy having stated it has no plans to withdraw from the Euro, a response from Brussels later in the week will be closely followed. Questions left lingering over what happens next have the potential to dramatically increase volatility for the common currency.

1.30pm BST sees the release of the only salient US economic data for the day, in the shape of the Chicago Federal Reserve’s National Activity Index for September. This is a relatively low-key release so is unlikely to carry much weight unless we see a significant deviation away from expectations. US Dollar sentiment seems more likely to be directed by reactions to foreign policy, be that the recent announcement that the US is to withdraw from a nuclear weapons treaty, or the idea that they may mobilise the military to protect the border with Mexico from an impending humanitarian crisis. One prospect is that the uncertainty pushes markets to take the risk-off approach, fuelling flows into classic safe havens including the US Dollar.

Brexit remains top of the agenda in the UK, with renewed media speculation over the weekend that Theresa May could face a leadership challenge. Although much of the EU withdrawal now seems to be agreed, one major sticking point remains the Irish border situation, and a series of events in parliament this week could provide further clarity. However, any leadership challenge would likely threaten the government’s majority too, paving the way for another general election. The accompanying uncertainty would inevitably be negative for Sterling.

GBP/USD

Friday saw the Pound make gains over the US Dollar (GBP/USD) as US Home Sales data disappointed, and optimism rose over a compromise being found regarding the Irish border situation. With the latter already looking tentative and risk-off trade having the potential to drive investors to the safe-haven Greenback, these gains could yet prove unsustainable. 

EUR/USD

As with Sterling, the Euro posted meaningful gains over the Dollar (EUR/USD) on Friday amidst optimism regarding Brexit and negative Dollar sentiment. The ratings downgrade for Italy has delivered no lasting downside so far, although the European Commission will need to tread a careful line if it is to avoid panicking the market into a sell-off.

GBP/EUR

The Pound to Euro cross has been trading in a very tight range overnight, but when the market sees some fresh indicators here, a breakout is likely to follow. With Brexit arguably being the more immediate influencer, pressure could be seen to the downside, but the potential for a stand-off between Rome and Brussels can’t be ignored either.