Major Overnight Headlines
• Trade-weighted GBP rises to 8-month high in London; UK unemployment rate falls to 7.7% in July
• French govt. cuts 2014 GDP growth forecast to 0.9%; sees higher budget deficit
• Italian senate committee delays vote on Berlusconi expulsion on fears of govt. collapse, Thomson Reuters
Given the softness in core rates and the modest rebound in the oil price this morning in London, we think the tone so far has been largely about position re-adjustment and profit-taking, following the sharper moves yesterday as “Syria premia” were unwound. Indeed, this would appear to fit with the fact that key US data for the week as a whole are “back-ended”, with claims tomorrow and retail sales on Friday. Any adjustments therefore leave market participants a bit more “square” heading into the numbers.
The further lag in the Syria debacle, which has delayed military action while we await Damascus’ decision on its chemical weapons stockpile, has been a positive development for the macro scenario. It essentially makes the picture tidy and wipes the slate clean heading into Thursday and Friday’s US data, where we will almost certainly get some further pre-FOMC fluctuation in FX and rates. Taken together, Thursday and Friday should offer the best opportunities for USD/JPY and EUR/USD movement; unless the data are wholly unexciting, the post-NFP adjustment lower in rates and the USD will either extend itself further or get backed out a bit more if the data are very positive.
Nevertheless, we expect moves to be rather limited in front of next week’s FOMC. The data are important, but the data tell us a lot less than we would like taken in isolation from the Fed’s language, [revised?] forward guidance and the September tapering amount; all of which we will get next week. We need to whole picnic basket.
As for the GBP, the BoE’s new “macro-pru” toolkit is still not reflected in the UK curve or in the value of the GBP and that is really all we have to say for right now.
Read the full report: FX Daily
BMO