he Pound extended its downward move against its major peers yesterday, falling to the 1.24 mark and its lowest level in 27 months versus the US Dollar after comments from Tory leader hopefuls Boris Johnson and Jeremy Hunt. Both candidates have voiced a desire to remove the NI ‘backstop’ from Theresa May’s withdrawal agreement. The issue here is, that the EU has both repeatedly stated that the WA is not open for renegotiation and that the ‘backstop’ must be a part of any exit deal.

With that in mind, investors are growing increasingly fearful that the only end to the impasse could be via a ‘no deal’ Brexit. While many analysts have raised their expected probability of a ‘no deal’ in the past few days (Deutsche Bank now put the odds at 50%), betting markets are holding firm and continue to show around a one in three implied probability of such an outcome.

Governor of the Bank of England Mark Carney is due to speak at midday today. Yet, with attention firmly on Brexit, investors will be awaiting the announcement of the new PM, expected next week. Johnson remains the clear front runner and it would now take something fairly extraordinary for him to not be named the next Tory leader.

Common currency falls on ECB easing bets

The Euro continued to lose ground throughout London trading on Tuesday, briefly sliding below the 1.12 level against the US Dollar this morning.

The main rationale behind the weakness in the common currency so far this week has been continued bets that the European Central Bank would ease policy at an upcoming meeting in order to support the Eurozone economy. Data out of the bloc has continued to disappoint in recent weeks, with ECB President Draghi suggesting last month that this could encourage the bank to lower rates or restart its QE programme. This is bringing next week’s Governing Council meeting into sharp focus. While we think that it is too early for the ECB to begin altering its policy, we think that there is a decent chance they could at the very least hint that looser policy is possible later in the year should economic conditions worsen.

Solid US retail sales data buoy the greenback

Meanwhile, the US Dollar continues to be well supported by some strong domestic data. Retail sales data out yesterday continued to point to robust levels of consumer activity in the world’s largest economy. Sales increased by a better-than-expected 0.4% in June after investors had eyed a slowdown to 0.1% (Figure 1).

Figure 1: US Retail Sales (2012 – 2019)