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Global market watch - 18th July 2019

Sterling recovered slightly overnight but remains near 2-year lows against the dollar and under significant pressure. The pound has lost more than 2% against the dollar this month, and HSBC said a no-deal Brexit outcome would push the pound down to $1.10. Yesterday, Brexit minister, Stephen Barclay, said the risk of no-deal was "under-priced". Traders shrugged off data on Wednesday, showing UK CPI was steady at 2%. Separate figures on Tuesday showed wage growth at 3.6%, meaning that living standards are improving as incomes rise faster than prices.

A Reuters poll showed that a majority of FX analysts think the ECB will cut the deposit rate in September. Eurozone inflation is below target, and the ECB is expected to cut its deposit rate by 10 basis points to a record low of -0.50% in September. Analysts are split on whether or not the ECB will restart QE this year.

The Fed Beige Book was released yesterday and showed a "positive" outlook for the coming months, with expectations for continued modest growth, despite concerns about trade-related uncertainty. This highlights the difficulty for the Fed, with domestic data remaining solid, but downside risks increasing. The risks for the Fed of staying on hold is probably now bigger than the risks associated with delivering a rate cut. Markets have fully priced in a US rate cut of 0.25% on July 31st, with a 30% chance of a 0.5% cut.
Asian stock markets fell overnight on reports that progress in the US-China trade negotiations has stalled. The usual safe havens of Japanese yen and Swiss franc found support. However, Japanese shares fell 2%, after disappointing Japanese trade data, as both exports and imports came in below forecasts.

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