LiveWire

The political chaos continues in the UK as on Wednesday Prime Minister Boris Johnson faces lawmakers that will probe him on integrity in politics and the rule of law. A number of high-profile and junior officials have already resigned, and Johnson is now on red alert for signs of a coordinated plot to bring him down. The chaos is hurting the confidence in the UK leadership and its economy, which is particularly sensitive to the strength of its European neighbors. The pound remains bruised, holdings near its 18-month low, with momentum remaining negative. However, signs of stabilisation in the UK politics could see the GBPUSD pair recover some of the large losses in the last few days. Moreover, the Fed's FOMC minutes could also favor a slight weakening of the dollar, supporting the GBPUSD pair. Nonetheless, traders must not be too hopeful as the shape of the UK economy is still facing a downturn that should weigh on the pound sterling in the medium term. 

The euro gets a hit as growth worries worsen. The pair EURUSD is down 0.9% this morning, trading around 1.0310. Deteriorating technicals point to an increasing likelihood of parity in the near future.

The euro slipped 0.55% against the dollar, to 1.0524, digesting comments from ECB Chief Lagarde that the central bank will move gradually but keep the option to move in more decisively in order to tackle inflation. On the other hand, Fed officials seem determined to hike 50 to 75 bps next month. The level of 1.05 could offer technical support, a level that has held since the rebound of last Friday. 

The sterling-dollar is seeing an interesting technical setup. The closing price has moved little for the past week, sticking to a very tight level (~1.23). However, looking at smaller time intervals, one can see the fight has been intense as all dips are bought and price increases are sold. Boris Johnson's government is facing the greatest headwinds since the 1970s as the country's inflation and productivity outlook are deteriorating, worsening the economy's post-Brexit pain, recalling the dark days of the 1960s and 1970s when commentators and politicians identified Britain as the “sick man of Europe” because of its performance. Despite this year's drop, fundamentals are weak for GBP, and further weakness could follow in 2022.

The US dollar is set to experience an increase in volatility as it reaches the corner of the triangle that it's been forming. Falling Treasury yields are having a mixed impact on the dollar; negative as yield differentials reduce the dollar's appeal compared to its peers, and positive as lower future growth expectations increase appetite for safe-haven assets like the dollar. Market participants will be watching whether today's Michigan inflation expectations could be the catalyst for a move in the dollar.