Morning Commentary: Hope for the Best, Plan for the Worst

Foreign Exchange - Morning Commentary
Hope for the Best, Plan for the Worst
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets are always looking forward. The British pound has been down for the fourth day in a row as markets have shifted expectations surrounding the Brexit negotiations. The change in leadership in the U.K. from Theresa May to Boris Johnson has changed market expectations and raised new concerns about a No-Deal Brexit. PM Boris Johnson and his new cabinet continue to take the hard line toward the EU surrounding the Irish backstop, and markets are preparing for worst case scenarios.
The British pound (GBP) is down in seven of the past eight sessions against the U.S. dollar, and has now fallen 2.70% since July 19. It has also fallen sharply against the euro over the past four days as the euro has temporarily stabilized. U.K. interest rates continue to fall, but the U.K. FTSE (stock index) has remained steady to higher as the historical relationship between a weaker GBP and higher stocks is working for now.
One other small silver lining for the GBP is that it appears that enough negative news has been priced in for the very short term. The GBP fell sharply in Asia again to test lows not seen since 2017, but during the London session, the GBP has been clawing back most of its losses. The supposed Brexit negotiation has a short window to completion of October 31. To our customers who are involved in the GBP, you can continue to expect volatile times ahead. Hope for the best, but plan for the worst.
  • The Bank of Japan (BoJ) kept policy on hold as generally expected. It added language that it won’t hesitate to add stimulus if risks to reaching its 2% inflation target materialize. The BoJ sees inflation running at 1.6% in FY 2021. The next BoJ meeting is in September where the probability for the central bank to provide more stimulus or reduce interest rates has risen to nearly 30%.
  • Swedish GDP for Q2 was a big disappointment. Expectations were for a gain of 0.3% but instead GDP fell by 0.1%. This brings the YoY GDP down from 2.1% to 1.4% and well below expectations of 1.9%. Like many countries in the EZ, Sweden is caught up in diminished trade volumes negatively impacting its economy.  The Swedish krona is the weakest of the majors today.
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