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The UK threw a spanner in Sterling’s works last week when it a bill that would give government the ability to “modify and disapply” aspects of the Withdrawal Agreement. 

The government admitted the Internal Market Bill will breach international law and has further undermined hopes of a post-transition trade deal between the UK and EU, though talks are continuing this week. 

As ever, when the likelihood of a no-deal increases, the pound struggles. 

Sterling slumps 

The pound’s value dropped by around 3.5% against both the US dollar and the euro last week, leading to falls from above US$1.32 and €1.12 to as low as US$1.28 and €1.08. 

It enters the new week slightly above those lows but remains under significant pressure, especially as the UK’s tougher social distancing restrictions come into effect today, following a rise in Covid-19 cases. 

Steady week for US dollar  

Sterling’s fall against the dollar was completely down to its own vulnerability as the US Dollar Index (DXY) remained static within a 100-point range (92.7-93.7).  

It opens the week at the middle of this range at around 93.1. 

ECB holds rates 

President of the European Central Bank (ECB), Christine Lagarde, disappointed markets when refusing to discuss the euro-dollar rate last week, amid speculation Europe might move to constrain the strengthening of the single currency. 

The ECB held rates despite arguments that a weakening of the euro would support the bloc’s exports. 

Flurry of big deals 

Equity markets remained on the back foot as the sell-off in the tech sector continued. However, a flurry of M&A deals over the weekend boosted markets – including the sale of the UK semiconductor and software firm Arm Holdings to Nvidia in the US. 

Global markets reacted positively as a result due to the perception that big deals are still going ahead despite the ongoing pandemic. 

The FTSE 100 index opened the week above 6000 this morning, and European bourses and Asian markets have also rallied. 

Oil weakens 

Oil continued to weaken last week hitting lows of around US$36.2 per barrel, having opened the week above $40. Rising Covid-19 infections have increased fears of another slump in demand. 

Solid week for metals 

Gold had a steady week, holding in the US$1910-1965 range. Silver also finished at around the same value it opened the week on at just under $27 per ounce. 

Week ahead 

Pound to remain volatile

Markets will continue to punish the pound if there are any further headlines which suggest the chances of a no-deal are increasing.  

The Internal Market Bill has its second reading today and MPs are already considering proposing significant amendments to the bill.  

Though it is expected to pass, there are a rumoured 30 Tory MPs who could rebel by backing an amendment requiring parliamentary approval for the government to override elements of the Withdrawal Agreement using the new powers granted by the bill. 

Fed to answer key questions 

The Federal Reserve (Fed) in the US will meet on Wednesday and could provide some insights on its new flexible inflation target in a press conference afterwards.  

There are key questions that remain unanswered about the policy, including whether there will be a time limit on how long the Fed wants inflation to run hot. 

These factors would play an important role in any future US interest rate changes and could determine whether the recent weakness of the dollar will remain for the long term.  

Other factors 

The Bank of England (BOE) is also due to make an announcement on interest rates on Thursday. No change is expected until the UK’s post-transition trading future becomes clearer. 

Covid-19 infection numbers will also be a significant factor in the strength of the US dollar, with a serious second wave of the pandemic likely to re-solidify its safe haven status. 

Economic Data   

Highlights this week include: 

Today (14 September)   

• Eurozone Industrial Production for July 
• OPEC monthly report 
• Scheduled speech by the ECB’s Lane 
• The US Treasury Department report 

Tuesday   

• UK Employment report 
• German ZEW sentiment report 
• IEA monthly report 
• US NYK Empire State manufacturing index 
• US Industrial and Manufacturing production 
• US weekly crude stocks.  
• Speeches from the Bundesbank’s Mauderer and the ECB’s Panetta 

Wednesday   

• UK Inflation report 
• US Retail sales data and Crude oil inventories 
• The FED interest rate decision and press conference 
• Speech by ECB’s Hakkarainen 

Thursday   

• Eurozone Inflation report 
• BOE Interest rate and QE decision 
• US Weekly Initial Jobless claims 
• Philadelphia FED manufacturing index, building permits and housing starts 

Friday   

• UK Retail Sales 
• EU Current account 
• US Michigan Consumer sentiment survey  
• The ECB’s Schnabel speaks