ith uncertainty over global trade still looming large and economic data out of the Euro Area continuing to surprise to the downside in recent weeks, investors are preparing for a cautious tone of communications that leaves the door open to lower rates later in the year. While we do not expect the ECB to change policy at today’s meeting, we think that there is a decent chance it tweaks its forward guidance to signal that lower rates may be on the horizon.

A sufficiently dovish assessment from Draghi that hints at a September interest rate cut would undoubtedly be negative for the Euro, even given the already high market expectations for a move at the September ECB meeting. By contrast, a more noncommittal stance that calms concerns regarding recent soft Eurozone data would likely send EUR/USD back up towards the 1.125 level.

Sterling edges higher as Johnson takes office

Sterling opened London trading this morning roughly where it began it, firming against the US Dollar on Wednesday as Boris Johnson took office for the first time as the UK’s new Prime Minister. His appointment and subsequent reaction in the Pound was very much a classic example of ‘buy the rumour, sell the fact’.

There were no big surprises in Johnson’s cabinet announcements, the most notable being the appointment of Sajid Javid as the new Chancellor. Johnson’s immediate mission will, of course, be forcing through Brexit before the end of October deadline. This, he reiterated, may involve leaving the EU without a deal in place should no alternative solution be struck.

US manufacturing activity falls to near decade low

Across the pond, investors largely ignored yesterday’s soft US data in favour of increased bets in favour of a dovish ECB.

The latest US PMI numbers were a disappointment, with a pick up in services activity insufficient to offset a sharp decline in manufacturing. The manufacturing index from Markit fell to the level of 50 that represents flat growth, the first time the measure has failed to show expansion in almost a decade. This provides further fuel to the argument that the Federal Reserve could be set to embark on a rather aggressive pace of monetary policy easing during the remainder of the year.