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A dove in hawk's clothing

Half empty

As the third quarter of 2019 draws to a close, it is not easy to be altogether positive about the global economy. Trump's trade war festers on. Manufacturers almost everywhere are struggling. Middle Eastern leaders reject the idea of war almost as if it were the default option. Brexit looms.

The latest shot in the trade war came from Washington, where a report on Friday indicated a possible financial decoupling and a restriction on US investments in China. In Riyadh, ten days after Iran's foreign minister spoke of "all-out war", Saudi Arabia's crown prince warned of "a total collapse of the global economy" if war were to occur between the two countries.  

The economic data on Thursday and Friday did little to lighten the mood. Economists at the European Central Bank see "a more protracted weakness, the persistence of prominent downside risks and muted inflationary pressures". US gross domestic product expanded at an annual pace of 2%, well short of the US president's promised 3%. Business and consumer confidence measures from the European Commission were mostly either lower or unchanged in September.

Shifting balance of risks…

…was the title of a speech by external Monetary Policy Committee member Michael Saunders on Friday. Mr Saunders has a reputation as something of a hawk, so investors were taken aback by a comment in the antepenultimate paragraph of his address.

The official line from the Bank of England for months, if not years, has been that whether Brexit is "smooth" or no-deal, interest rates might have to go up. The bank reiterated that position in this month's policy statement. Mr Saunders expressed a different view on Friday, saying "it might well be appropriate… perhaps to loosen policy at some stage".

Sterling reacted sharply, dropping half a US cent in a hurry. It had regained the bulk of that loss by mid-afternoon but then set off lower again. The pound was the joint worst performer alongside the NZ dollar and Swedish krona: weak retail sales held back the krona while the Kiwi took a bath after ANZ's Business Outlook reported a fall in business confidence.

Growth and Brexit

The Conservative party conference is likely to be a fertile source of tradable news and rumour in the next few days. Expect the rhetoric to have a laser-like focus on leaving the EU with no deal on 31 October. Today will also be an unusually busy day for data - the last day of the month is more often than not quiet.

Purchasing managers' index readings from China this morning were better than expected. The services PMI came in at 53.7, almost unchanged on the month, while one manufacturing reading exceeded forecast at 51.4 and the other only just missed the cut at 49.8.  

There are also second quarter GDP figures from Britain and Spain, inflation numbers from Italy and Germany and jobs data from Germany to follow. The North American contributions are Canadian raw material and industrial product prices and manufacturing indices from the Chicago and Dallas Feds. Tonight it is likely that the Reserve Bank of Australia will cut its cash rate from 0.75% to 0.5%.

GBP: Further volatility could follow, whatever the complexion of Brexit

GBP: Further volatility could follow, whatever the complexion of Brexit

USD: Talk of block on Chinese investments

USD: Talk of block on Chinese investments

EUR: ECB gloomy on outlook

EUR: ECB gloomy on outlook

SEK: Retail sales disappoint

SEK: Retail sales disappoint

NZD: Business confidence fades

NZD: Business confidence fades

AUD: Rate cut likely tonight

AUD: Rate cut likely tonight

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