nvestors snapped up risk assets worldwide, including emerging market currencies. Scandinavian and antipodean currencies led the way in the G10, while Sterling put in another good performance after Boris Johnson’s massive setbacks in his effort to take the UK out of the European Union regardless of Parliament. In addition to the US dollar, the Japanese Yen and the Swiss franc underperformed amid the general risk-seeking mood.

All eyes are now on the September ECB meeting Thursday. Markets expect bold changes in monetary policy, but there’s wide disagreement on what that will be; rate, forward guidance and the potential restart of QE are among the possibilities. Markets will also keep a close eye on Parliamentary developments around Brexit.

GBP

The focus for Sterling remains obsessively focused on Brexit developments. Last week saw a materially lower risk of the UK crashing out of the EU without a deal, which is now being priced at roughly 25% in betting markets. The desertions of MPs from the Conservative party not only thwarted Boris Johnson’s plans, but threatened to tear apart the party itself. Curiously, financial markets seemed to rejoice at this, sending the Pound sharply higher for the second consecutive week. We did see the first signs in the economic data that uncertainty is starting to really bite, as the PMI index of service activity came out very close to the 50 stall level.

Our prediction that the Brexit impasse cannot be resolved without a general election is coming closer to reality. The only obstacle that remains is Boris Johnson’s refusal to guarantee there will not be a no-deal Brexit while the voters are being consulted. We expect this obstacle to be surmounted in the next two weeks, which given Sterling’s very low levels may serve as a catalyst for a rally.

EUR

Expectations are extremely high for easing measures out of the September ECB meeting on Thursday. Markets are pricing a 50/50 split of a 10 vs 20 bp cut in the deposit rate; a restart of the asset purchase program; dovish adjustment to forward guidance; and a raft of mitigating measures to protect banks from the effects of taking rates further into negative territory. We think there is a lot of scope for disappointment in one or more of these areas. Should that be the case, we can expect a sharp rally in the common currency on Thursday. At any rate, this should be one of the most interesting weeks in months for the Euro.

USD

News out of the United States were limited during the holiday-shortened week. The announcement that the US-Chinese trade talks would resume. Economic data continues to surprise mostly on the strong side. However, until the Federal Reserve meeting next week, we expect currency markets to be focused on events in the Eurozone and the UK. Thursday inflation data will be the last key data point before the Federal Reserve meeting, so we expect this release to have an outsize impact on currency markets.