After two days of gains markets in Europe slipped back yesterday, weighed down by uncertainty about the economic outlook, as concerns about trade and geopolitics dominated the news flow.

Amidst all of the news flow it is becoming apparent that investors appear to be hunkering down for further economic weakness and the prospect of additional losses for stock markets. How else to explain the moves we are seeing into bond markets and precious metals, as well as haven currencies like the Swiss franc and Japanese yen.

US 30-year yields fell to their lowest levels on record, and below the Fed funds rate in the process, meaning the entire US yield curve is now inverted.

Italian 10-year yields hit their lowest ever levels on the back of optimism that Italian Prime Minister Giuseppe Conte would be tasked with forming a new government with the help of 5 Star and the Democratic party in what could well be a case of a crisis deferred. Any new government formed by these unlikely bedfellows has the potential to be a fairly short-lived affair, given that the onus will now fall on a new administration to implement new EU mandated spending reductions of up to €23bn this autumn. These are not expected to be popular and likely to feed into the populist narrative of Matteo Salvini.

The pound also had what is likely to be one of many more turbulent days in the days and weeks ahead, sinking sharply on the back of the decision by Boris Johnson to suspend parliament from the 12th September in order to set a new legislative agenda. While there is nothing strange in this course of action, it happens every time a new government seeks to set out a legislative agenda, the length of time that Parliament will be suspended has become the course of much heated debate and discussion.

The closure, which is set to last for five weeks until the 14th October, is already facing a number of legal challenges from MPs and activists who have expressed outrage at the stretching of parliamentary precedence. The calculation here would be that the Prime Minister is taking a high stakes gamble on forcing a vote of no confidence and daring MPs to push him towards calling a General election, when they return from recess next week.

What appears to be being forgotten amongst all of the heat, light, and hysterical claims of a coup from yesterday’s events is that MPs still have two big levers they can pull to try and prevent a no deal Brexit from happening.

One of them is the previously mentioned vote of no confidence, which could come as soon as next week, and the other lever is to revoke article 50, both of which MPs seem curiously reluctant to use.

Much has been said and speculated on over the past few days about the prospects for some form of fiscal stimulus from the German government, against a weak economic backdrop for the Germany economy for Q3. The weakness in recent manufacturing PMI’s and the IFO business surveys is certainly cause for concern, but with German unemployment already very low, the bar to acting is still very high, given any new spending would have to pass approval by the German parliament.

Today’s German unemployment numbers are likely to underscore that, coming in at 5% for August, while the latest preliminary CPI numbers are expected to show headline inflation falling further from 1.7% to 1.5%, which is likely to add more grist to the ECB mill for lower rates and more asset purchases.

On the data front the US economy is set to be back in focus with the latest revisions to Q2 GDP, which is expected to slip slightly from 2.1% to 2%. Weekly jobless claims are expected to remain low at 215k, a slight increase from 209k last week.

EURUSD – continues to look soft, in spite of Monday’s failed attempt to move above the 1.1170 area. As such we could well slip back to retest the lows at 1.1020, and on towards the 1.0800 area. Key resistance sits at the 50-day MA at 1.1200 as well as the 1.1250 area.

GBPUSD – slipped briefly below the 1.2200 area, rebounding from the 1.2155 level, and as such the risk remains for a move through the 1.2300 area towards the 1.2400 level. Major support remains down the recent two-year lows at 1.2015, and this remains a key level along with major support sitting at the 1.1980 area.

EURGBP – rebounded from the 0.9015/20 area but needs to push back above the 0.9180 area to argue a short-term base is in. The weekly reversal from a couple of weeks ago still remains valid while below 0.9180, with the potential to move towards the 0.8920 area, on a break below the 0.9000 level.

USDJPY – having hit its lowest levels since November 2016 earlier this week at 104.45, the US dollar needs to recover back above the 107.00 area to stabilise, with a break above the 107.20 level arguing for a move back to the 108.20 area. A move below 104.30 opens up the prospect of further losses towards 101.20.

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