This week is shaping up to be another volatile one. The main focus will, of course, be the Federal Reserve meeting on Wednesday, as markets try to gauge how dovish the Fed is going to be given positive economic and inflation developments. The Bank of England on Thursday brings to a close a week packed with key central bank meetings. Finally, we look to GDP growth data out of the Eurozone on Thursday to confirm the extent of the economic slowdown there.

GBP

The appointment of Boris Johnson as Prime Minister did little to move the Pound, given that it was completely priced in by the markets.

No news proved good news for Sterling last week, which ended up outperforming all G10 currencies, save the Dollar. There was little news on the Brexit front, but with Johnson demanding a revision to the Irish backstop and the EU reiterating that the current deal cannot be renegotiated, odds makers are slowly increasing the likelihood of a no-deal Brexit. Our base scenario is still that the Brexit issue cannot be resolved one way or another without a general election.

EUR

It’s perhaps surprising that the Euro held up as well as it did given the negative news flow last week. The PMI indices of manufacturing business activity dropped even further to contractionary levels. While the more important services number held up fairly well, the bottom in Eurozone manufacturing is not yet in.

Then, on Thursday, the ECB made it clear that an easing package was on the way as early as the September meeting. President Draghi sounded particularly dovish about the situation in manufacturing and low inflation. With the world’s two most important central banks trying to outdo each other in adding stimulus to still growing economies, we still think that the Euro is likely to outperform the Dollar, as rates have a lot more room to fall on the other side of the Atlantic.

USD

The strong second-quarter growth numbers in the US seemed to contradict the pessimistic view voiced by the Federal Reserve since the last FOMC meeting. Growth outperformed expectations on the back of very strong consumer spending, while business investment lagged. More importantly, the deflators both rose quite strongly. Overall, a US economy growing at moderate levels with most inflation indicators at or above Fed targets does not seem to be primed for additional monetary stimulus beyond the practically certain cut we will get next week.

The Fed will, however, have the final word in these matters. We think that the “dot plot”, where Fed officials give their best estimate of the future path of interest rates, will be critical. It is quite possible that interest rate markets have got ahead of themselves in pricing up to four cuts over the next 12 months.