Pound holds onto bulk of gains as Parliamentary return nears

Today’s macro highlights

EUR - Eurozone CPI (August)
USD - University of Michigan Sentiment (August)

Pound holds onto bulk of gains as Parliamentary return nears

Wednesday’s gains for Sterling, driven off the back of some long-overdue optimism over Brexit, have been sustained as we move towards the weekend break. Yesterday’s notable shortfall in UK consumer borrowing caused little reaction for the Pound, despite the fact that this points very much towards the idea that the economy is slowing. Granted, consumption has been depressed by the hot weather over the summer, but for such a decline not to impact the currency in a meaningful way underlines just how much focus is being placed on the Brexit situation right now. 

We have a relatively quiet day ahead in terms of macroeconomic data. The Eurozone inflation reading for August is set for release at 10am BST and given the run of good news we’ve seen out of Frankfurt of late, the expectation here may well be weighted on the upside. Any shortfall could raise questions over the ECB’s aspirations when it comes to policy tightening and in turn may end up weighing on the common currency in the short term. 

3pm BST sees the release of the University of Michigan consumer sentiment data. Rising interest rates and concerns over sustainability of the brisk economic growth in the US are very much on the radar, so the market may well take a print that shows even modest contraction in its stride. However, with the DXY dollar index sitting around its lows for the month, fresh optimism here could well serve to support a degree of dollar buying as we head into the long weekend for US markets.

The UK economic calendar may be rather muted today, but Dominic Raab and Michel Barnier are scheduled to meet for a marathon six hour session in Brussels. Any messages from this could well provide further near term direction for the Pound and as we’ve already seen this week, positive signals are being well received. Beyond this, with Parliament reconvening on Tuesday, the weekend’s political media will be worth watching. As we have previously noted, there remains a real risk that Theresa May’s leadership will be contested, whilst the battle over just what Brexit should look like is running out of time. 

Many US markets are closed on Monday for the Labor Day holiday so this could result in some reduction of volumes and in turn stand to exacerbate volatility at the start of next week.

GBP/USD

The pair is holding onto the bulk of Wednesday’s gains, spurred by that optimism over Brexit. As noted, fresh talks on the subject today should be expected to provide fresh direction here. 

EUR/USD

Gains from the last two weeks have stalled, although inflation data due for release shortly could have the potential to drive the pair towards summer highs. That may however be reliant on yesterday’s shortfall in German CPI not being repeated in today’s corresponding Eurozone number.

GBP/EUR

There’s the potential for the Pound to post a third consecutive day of gains over the common currency today if we see further progress in Brexit negotiations. This and the UK political risk factors are without doubt proving far more influential than the macroeconomic data.