Economic Update

Oil falls on yet another attempt at a US-Iran deal

A cessation in US air strikes, reports of a potential deal between Iran and Oman over traffic flow through the Strait of Hormuz, and a reported ceasefire between Israel and Hamas have all helped reduce oil prices over the weekend. Brent crude is back down to $83 per barrel, having recently traded as high as $102. However, optimism around the flow and price of energy may prove short-lived.

US President Donald Trump indicated that the pause in bombing was temporary and contingent on rapid progress towards a deal. Meanwhile, Iranian officials have stated their commitment to peace talks while accusing the US of breaching its commitments.

How many times will the US return to the negotiating table, and how many times will such efforts be thwarted? Is this time any different from the last?

US & Japan joint action on the yen, but interestingly US sells EUR for JPY; NFPs in focus at the end of the week

The US confirmed that it acted to bring down the value of the JPY last week. Interestingly, the US Treasury indicated that it sold EUR for JPY. The news has not triggered significant EUR underperformance, but the fact that US authorities chose this route suggests a new dynamic in FX markets may be emerging.

The BOJ apparently bought somewhere in the region of $50bn in yen, while US intervention totalled approximately $5-10bn, bringing USDJPY down to a low of 155.23 in trading this morning. This is something we have repeatedly warned about over recent quarters. However, without further intervention, I can see USDJPY drifting higher once again. USDJPY has moved lower by roughly 5.3% during the latest round of intervention, but that move only returns the currency to levels last seen in May.

This week, financial markets may be focused on the release of July non-farm payrolls data. Following disappointment in the Q2 GDP figures last week, the question is whether these numbers will materially outperform or underperform market expectations. In the run-up to the NFP release, data on job openings and job cuts will also be published. Concern over businesses hiring fewer people remains significant, as a continued decline could have negative knock-on effects for consumer spending and business investment.

Will the economic risks reassert themselves post the BOE?

The Bank of England's decision to leave interest rates on hold last week came as little surprise to financial markets. Some members of the committee viewed inflation risks as paramount, while the majority remain unconvinced that second-round effects will emerge, particularly given weak hiring intentions and the downward trajectory in real earnings growth.

There are no materially important releases due this week, and markets also have no major speeches on which to focus. The data and surveys that are released will likely point to continued sub-trend growth in the UK. Perhaps market attention will remain on announcements from the new UK Prime Minister, Andy Burnham. After a strong start, momentum already appears to be fading, with events dictating headlines rather than policy announcements dominating.

For GBP, outside of further authority-led activity, it remains difficult to build a positive case for GBPUSD or GBPEUR. Current economic and political conditions suggest headwinds to the stated goals of faster growth, more jobs and higher spending on crucial government departments. GBP could find itself back under pressure in the second half of the week.

EU gas inventory levels at 18-year lows, which could cause a price surge into a higher-usage period

The European Union has several problems on its hands, but I will highlight just two.

Firstly, the surge in migrant crossings into Spain's African-governed region of Ceuta, which at one point reportedly saw around 60,000 people cross the border illegally within 24 hours, has prompted other countries to tighten border controls on those entering from Spain. This suspension of the Schengen agreement has angered Spanish authorities but was a predictable response. Although Spanish authorities have claimed that most have returned across the border, there is no independent verification of this.

Meanwhile, reports suggest that European gas storage levels are at 18-year lows and roughly 17 percentage points below the five-year average. That could undermine activity during periods of higher gas usage in autumn and winter while also creating upward pressure on energy prices. Hardly positives for a euro area economy that is already set to underperform.

CAD waits for employment data; MXN waits on Banxico

This week's key release from Canada is the employment report, due on Friday. Will employment continue to increase? Will there be any improvement in unemployment? Will earnings growth continue to slow? I see the risks as skewed to the downside, particularly given recent US tariff announcements aimed specifically at trade with Canada following the expiry of temporary tariff measures. CAD tried, but failed, to break back beneath C$1.40. Could there be a move below that level this week? Alternatively, in the absence of renewed FX intervention elsewhere, could the USD recover once again?

As for the Mexican peso, the focus will be on the Banxico meeting. Since the last meeting, Mexico has recorded weaker consumer confidence, lower CPI inflation, a much larger-than-expected fall in manufacturing production in May, weak retail sales and higher unemployment. However, Q2 GDP figures were stronger than expected. Market consensus is for no cut to be delivered by the Mexican central bank, but I still feel that, based on the evidence, a cut is merited. Perhaps the central bank will hint at a future cut, which could yet undermine MXN against the USD once again.