UK: Election motion to fail, sterling to suffer

It seems unlikely that opposition MPs will agree to hold a snap election and with uncertainty likely to remain high, the pound should remain under pressure.
 

USD: Powell comments cement rate cut expectations

Some comments by Federal Reserve Chair Jerome Powell on Friday helped the markets cement expectations of a rate cut in September, although they failed to provide an indication of further easing ahead. In turn, market rate expectations have held broadly stable since earlier last week, with the OIS curve currently showing 59 basis points of easing by end of 2019 and 115bp by the end of 2020. This week, the only highlight in terms of US data releases will be the August inflation data on Thursday, likely leaving the dollar mostly driven by any developments on the trade side. Meanwhile, Chinese export numbers dropped in August, weakening the yuan. But the news had a limited effect on other risk sensitive currencies, which were likely supported by China’s announcement of a cut in its reserve requirement ratio.

 

EUR: Holding stance

A few days away from the key European Central Bank meeting, markets are expecting President Mario Draghi to unveil a new package of monetary easing. We suspect that the euro will stay broadly range-bound at the start of this week, with markets opting for a wait-and-see approach ahead of Thursday’s announcement.

 

GBP: Johnson still trying to avoid an extension

Today, the UK parliament will vote on a motion to hold a general election. With the government and the opposition currently failing to agree on the date of the election, it is widely expected that the motion will not have the two-thirds majority required. Indeed, it seems unlikely that opposition MPs will agree to hold snap elections without having some certainty that Article 50 will be extended.  

PM Johnson has until Thursday to prorogue parliament, but may decide to call a suspension as early as tonight, with parliamentary activities then resuming on 14 October. With the possibility of going to the polls before 31 Oct seemingly off the table, another extension of the Brexit deadline becomes the crucial point. According to a report in the Telegraph, PM Johnson is seeking a legal way to stop the extension. Such a plan may involve a letter to the EU that specifies the UK’s unwillingness to have another delay. With many options still on the table, uncertainty is likely to remain high, ultimately placing downside pressure on GBP. Today, GBP/USD may move back towards 1.22.

 

MXN: Slowing inflation to keep easing expectations in place

August inflation numbers released today (1200 BST) are expected to keep signalling a moderate inflation backdrop. This should further underpin expectations for more cuts by Banxico, after the overnight rate was trimmed to 8% in August. However, it seems fair to assume the central bank will match the Fed's manoeuvres quite closely, and this should keep the US-MX rate differential immune to significant shocks. In the medium term, this may come to benefit the peso, which may remain supported in line with other emerging market FX should risk sentiment keep stabilising.