The week ahead is set to be a quiet one in terms of macro data, but there will be plenty of company earnings to look forward to. In addition, the UK will welcome its new Prime Minister while the ECB will make a decision on interest rates.

Here is the calendar highlights for the week ahead:

  • Monday – No major data
  • Tuesday - Next UK Prime Minster chosen today; no major data
  • Wednesday: Eurozone flash PMIs
  • Thursday: German Ifo, ECB (rates expected to remain at zero) and a couple of macro pointers from the US including durable goods orders
  • Friday: Advance US GDP

From the above, it is clear that there are at least three major scheduled fundamental events to look forward to: (1) the Tory leadership race finale; (2) ECB rate decision, and (3) US Q2 GDP estimate. Let’s take a look at these in turn.

  1. On Thursday, MPs passed an amendment to prevent a Parliamentary shutdown in October ahead of Brexit. The news helped to underpin the beleaguered pound. Whether sterling will rise or fall in the coming weeks will depend on what direction Brexit will head under the new Prime Minister, who will be chosen on Tuesday by Tory MPs. With the parliament already deciding that a no-deal Brexit is a no-go and also taken measures to avoid a parliamentary shutdown during the critical Brexit period in October, this has undermined the hard-line strategy of Boris Johnson, the favourite to take over Theresa May’s job. Obviously a lot can and will happen from now on until the Brexit date, so uncertainty will remain. But with the next PM’s options already limited before they take the job, I have a feeling it won’t make much of a difference how Brexit will be handled whether it is Boris Johnson or Jeremy Hunt at the helm. A win for the former is already priced in, so a potential victory for Mr Hunt could be the real surprise, and may provide some short-term relief for sterling.
  2. Eurozone PMIs and German Ifo will be among the week’s key data from the single currency bloc that the European Central Bank might take into account when deciding on interest rates on Thursday. The ECB has been pushing out its rate hike expectations, but the markets will now be wondering whether the central bank will instead talk up the prospects of loosening – rather than tightening – its monetary policy, and soon. With the Fed set to cut rates in the last week of July, and other major central banks having already loosened their policies or turned dovish, the ECB could very well prepare the markets for more stimulus or even negative interest rates. The euro could drop sharply if that turns out to be the case, while if the ECB is not as dovish as many expect them to be then watch out for a short squeeze rally.
  3. US second quarter Advance GDP estimate is expected to print a meagre +1.8% q/q annualised (that is, quarterly change x4) versus +3.1% in Q1. This should be market-moving data, especially if the actual shows a large deviation from the expected reading. So, hold off your weekend plans until after it is published.

Featured chart: EUR/GBP

Clearly the pound, euro and dollar will all be in focus due to the above fundamental reasons. The EUR/GBP should be the one to watch if you prefer to avoid the dollar until Friday’s GDP is published. But it is worth pointing out that GBP/USD was able to hold above the 2018 low of 1.2440 for the second consecutive week, after slipping below this level in mid-week on both occasions. There is a possibility therefore that the cable may be in a reversal profile now, especially in light of dovish commentary coming out of the Fed. The GBP/USD needs to create a higher high now to confirm the potential reversal. But as far as the EUR/GBP is concerned, well there is a shooting star/gravestone doji candle to watch on the weekly. With rates potentially reversing, traders may wish to zoom into smaller time frames for trading this potential reversal more precisely.

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