Sterling maintained as hopes of a blockade persist
Things have become a little more intense in the UK, as Queen Elizabeth II willingness to validate a prorogation of Parliament is surely not appreciated by a good part of UK citizens. The measure, if executed, would slash the number of days UK MPs would have left to block a no-deal departure from the EU between 32 – 35 days depending on the date of implementation, set for 9 September earliest. However, sterling appears resistant considering the recent headlines, as potential solutions, including a legal challenge of PM Johnson’s prorogation plan, a vote of no confidence and a drafted legislation that would block a hard Brexit remain on the table, giving GBP traders reasons to favor the upside. Yet the room of maneuver appears limited as the prorogation period would leave a minimum of six days until UK MPs officially return from Summer break next Tuesday, limiting the scope despite MPs willingness to trigger intense emergency debates before the 2-month Brexit deadline. Risks remain tilted to the downside for GBP, as suggested by 3 month 25 delta risk reversal pointing at -1.86%, close to 4-months low.
It seems pretty hard to read through UK PM Boris Johnson Brexit plan, considering last week’s acceptance of Merkel’s “30-day challenge” to find an appropriate solution regarding the Irish backstop or the fact that disarming the UK Parliament was probably thought to unlock the EU position and therefore allow changes in current Brexit arrangements. In any case, it seems that numerous means are sought to eviscerate UK top leadership, which would ultimately put any desired plans into jeopardy. As UK MPs are expected to come back from Summer recess next week, GBP is likely to be volatile as investors will carefully monitor Brexit developments.
For now, GBP/USD is expected to remain under pressure, approaching 1.2170 short-term ahead of US second GDP release.
US Growth Unchanged
From the US, key data for release, including the second estimate of Q2 GDP growth, jobless claims, and the July pending home sales and advance inventory data. Q2 second estimate of GDP unchanged at 2.1% vs. 2.0% consensus. Regarding 2nd estimate of GDP growth, we don’t expect a significant shift in the revision as offsetting move should balance out. Consumption is likely been revised higher consider the strong July retail sales report. On the other hand, weaker government spending and widening trade balance will weigh on growth. The export picture remains gloomy as strong USD pushes manufacturing business to Europe. Import growth is decelerating despite strong consumer spending and wage growth. The boost provided by last year’s tax cuts is fading and concern over outlook due to trade tensions are slowing capital spending. Yet despite grim numbers, consumption, which accounts for 70% of GPD has kept growth from moving too sharply. Tomorrow Personal Income and Spending is likely to show that income rose by 0.4% and nominal spending 0.7%. These are solid numbers. Once again the US consumer to supporting the USD economy in spite of broad global weakness. Yet, do fundamentals matter at this time? A single tweet by President Trump can instantly change the fates. USD direction will be driven by macro developments specifically US-China trade relations.
