Sterling dropped back towards five-month lows on Wednesday after Boris Johnson reaffirmed his desire to take Britain out of the European Union by the 31st October deadline, with or without a deal. Boris Johnson is still the clear favourite in the race to replace Theresa May, and markets are concerned that the apparent Prime Minister in waiting is “serious” about exiting regardless if a deal has been negotiated and passed through parliament.
This kind of rhetoric increases implied volatility in the market as a volatile political situation looks inevitable. The pound looks set to come under renewed pressure with Johnson’s comments in the coming weeks, especially with a no-deal looking under-priced by investors. Data from last week showed that traders had cut short bets against the pound, and we expect this to reverse as the week progresses.
The dollar strengthened yesterday as traders scaled back on bets that the Federal Reserve would cut the benchmark interest rate at the July meeting. This follows comments from St. Louis Fed President James Bullard , considered the biggest dove out of the U.S. central bankers, who said that an aggressive 50 basis point cut in rates would be “overdone”. Despite this, the market is still pricing in a strong likelihood of a 25 basis point decrease at next month’s meeting.
12:00 – EUR: German Harmonized Index of Consumer Prices (MoM) (Jun); expected to decrease to 0.1% from 0.3%
13:30 – USD: Gross Domestic Product Annualized (Q1); expected to remain at 3.1%