Markets ready for weekend break as turbulence continues

Today’s news headlines:

  • Renminbi falls to weakest level since 2008’ Falling equity markets, weak economic data hit sentiment over currency (Financial Times)
  • ECB sticks with planned December halt to bond purchases’ Despite market uncertainty, Draghi stands firm (Financial Times)
  • Tariffs bite US economy with record trade gap, cooler orders’ deficit widened to a record in September (Washington Post)
  • Brexit talks on hold with British PM Theresa May's team in disagreement, sources say’ no new plan expected before Monday’s budget (Bloomberg)

We were left with some big moves on the major currencies during Thursday’s session after a series of data points were left taking the market by surprise. That US durable goods order figure came in notably higher than expected with a sharp increase in spending on US military aircraft acting as a key driver here and serving to boost the dollar as a result. Add to this those fears over a global economic slowdown and the flight for safe haven assets is very much on, in turn driving flows into USD. As a result, the DXY dollar index has been driven close to 16 month highs and with US data set to be in focus again today, further gains could well be forthcoming. 

Despite the broader market turmoil, yesterday the ECB also maintained its stance over monetary policy – bond buying would conclude by the end of this year and the first rate-hike in a decade would be seen by the end of 2019. There are some questions as to whether markets are still buying into this plan, although with a data-light end to the week for the Eurozone it’s arguably going to be a case of waiting until next week for any further clarity here. 

In the US, we have the advance GDP reading for Q3 set to be published at 1.30pm and this is tipped to show something of a reversal of recent gains. Expectations put this figure at 3.3%, down from 4.2% and although markets may be willing to brush off the reversion, it’s going to be considerations as to where the number goes next that will carry more significance. Stabilising around 3% will arguably be seen as good news, but the real risk is the pace of any decline from here. After recent dollar gains, the prospect of an economic shock could result in something of a reversion for the currency going into the weekend break. 

The Pound took another beating yesterday, with the absence of UK economic data offering no respite here. We have a raft of factors combining to drag on Sterling right now, with the dollar gaining support off the back of that trade data and the safe haven flows, whilst ground was lost to the Euro even though questions linger over the ECB’s ability to deliver against policy tightening expectations. On top of this, the Brexit situation remains in disarray and with just over five months of the process left to run, the risk of a no-deal outcome is rising. Monday’s UK government budget may provide some respite depending on the classic economic metrics such as borrowing forecasts, but beyond this it’s the fact that given the uncertainty over trade, investment inflows are going to dry up and that shortage of demand for GBP will leave the currency under pressure.

GBP/USD

The pair remains under pressure. A short term relief rally may be seen if the US GDP print disappoints this afternoon, but otherwise a drift towards the 2018 lows seen in August may well follow.

EUR/USD

An absence of Eurozone economic data today leaves the pair very much at the mercy of the US dollar. With the recent run of losses, there is the potential for a rebound to be seen in the short term, although an overshoot in something like the US GDP print could well accelerate the pair’s decline towards fresh lows for the year.

GBP/EUR

Brexit uncertainty remains the more immediate risk than changes to Eurozone monetary policy plans or indeed the potential for a standoff between Brussels and Rome over Italy’s budget proposals. As such, Sterling may have more potential for losses in the short term, even if next week’s UK budget can offer some breathing room.