04/06 – Bank of England Brexit warning takes sterling lower

GBP: Brexit risks bubbling up again
EUR: ECB meeting important for central bank strength
USD: Dollar pushes back after strong data

Sterling

We knew it wouldn’t last and while it may be premature to say that the dollar may not weaken further against sterling, the USD bit back through yesterday’s session on a combination of stronger than expected US data and a wider market belief that the greenback had been oversold.

Sterling similarly has fallen back against the euro through the past 24hrs against a backdrop of increasing Brexit risks ahead of the end of this week’s trade talks tomorrow. Reports that Bank of England Governor Andrew Bailey had told banks to step up plans for the UK to leave the EU without a trade deal did not go unnoticed.

UK construction data is due at 09.30 and is expected to show a shallower rate of contraction than in April amidst the full lockdown.

Euro

Economists like myself are sometimes guilty of saying that this upcoming central bank meeting is the most important in months or years but with today’s European Central Bank meeting, that is not hyperbole.

This meeting comes after the German Constituional Court ruled against the ECB’s QE policies and amidst an environment of cautious agreement on wider economic spending to help the EU, something that could limit the chances of another Brexit scenario.

The key thing today is whether the ECB announces a further lump of QE under its Pandemic Emergency Purchase Plan or PEPP. Some in markets expect an EUR500bn increase today as a way of showing to the wider world, and those judges in Karlsruhe, just who’s in charge. A disappointment to this expectation would cause a slight dip in the EUR although we think it would be relatively short-lived given the wider risk appetite in markets currently.

The ECB announce their decision at 12.45 GMT with the press conference following at 13.30.

US Dollar

We have seen some vicious dollar snapbacks in the past and the moves in the past 24hrs was not one of them. The USD is trading calmly after 5 days of slow but persistent losses. Better than expected news from the services industry and a slight calming of tensions on the streets of major metropolitan areas will have both helped the greenback higher.

What could give it a real shot in the arm later is the latest round of initial jobless claims; a continual slowing of new people being made unemployed may be enough to restart a market trade idea that the US is recovering quicker than most think.

Elsewhere

Alongside the move in the USD we are also seeing some profit taking by investors in AUD and NOK that have both moved an outsized amount in the past few weeks. Lower commodity prices are also helping that move.

Have a great day and please take care.

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.