Downside risks to the global outlook have been reinforced by the standstill in the US-China trade dispute, coupled with persistently weak economic data. However, we still expect this to be mitigated by looser monetary policy as well as the prospect of more supportive fiscal stances.

Resultantly, we continue to look for 3.2% global GDP growth in 2019 and 3.4% in 2020. Markets have also exhibited slightly less pessimism about the outlook so far in July thanks to more accommodative policy. But sentiment remains fragile against the current risk backdrop, particularly amid concern that possible USD exchange rate intervention could lead to protectionism becoming entrenched.

The lack of any hint of runaway inflationary pressure looks set to sway the Fed’s hand on 31 July and persuade it there is little downside to enacting a quarter point cut in the Fed funds target rate to 2.00-2.25%. We think this will be followed with a further 25bp reduction in September and third move in 2020. The policy easing would effectively be insurance against the continued threat from the global growth backdrop, despite a relatively solid domestic economy.

Further, Fed Chair Powell is also eying this action in the context of efforts to lengthen a US expansion, now 121 months long albeit shallow by historical standards. Here the Fed chief is keen to expand the returns from growth further into the corners of the workforce. Moreover, pressure from President Trump will also no doubt have pushed the Fed further towards easing.  

Growth remains lacklustre, with some members of the ECB Governing Council now conceding that the soft patch is no longer temporary. Industrial output remains a key factor dragging on growth and is one reason for a small downgrade in our GDP forecasts for 2019 (from 1.2% to 1.1%) and 2020 (from 1.5% to 1.4%).

With inflation continuing to trend below target and downside risks growing, we now anticipate an easing of ECB policy, beginning with a 10bp cut in the deposit rate to -0.50% in September and then a further move to -0.6% in Q1 2020. We also expect such a move to be accompanied by a tiering of the negative interest rate regime. However we suspect the ECB will hold off on a relaunch of QE. Overall we have revised our €:$ profile lower, with our end-year targets now standing at $1.12 (2019), $1.15 (2020).  

Boris Johnson is the new Tory leader following his victory over Jeremy Hunt. On Wednesday 24 July he will become Britain’s new Prime Minister, before parliament rises the following day for summer recess. With conference recess also just around the corner, Mr Johnson has limited time to find a solution to the now 3-year-old issue that is exiting the EU.

Thus, our expected case is that a further extension will be agreed between the UK and Brussels despite BoJo’s threat of a ‘do or die’ departure on 31 October, which has heightened no-deal fears in the last month. But what will happen to sterling? In our view we will see no release of pressure until further clarification on Brexit. We judge sterling will fall to $1.21 by end-Q3 2019 before modestly recovering to around the $1.30 mark in mid-2020.

We continue to see little near term motivation for any policy adjustment at the Bank of England, amidst continued Brexit uncertainties; our current projections still see the next Bank rate move as a hike in Q4 2020.