09 August 2019: Sterling hit by fresh election rumours

Sterling hit by fresh election rumours

August 9th: Highlights

  • Concerns over no-deal compounded by election fears
  • Effect of Chinese “warning” over currency devaluation yet to be fully understood
  • Euro becalmed as market awaits fresh impetus

Sterling trades at lowest since August 2017 versus euro

The pound resumed its downwards path versus the euro yesterday as it was rumoured that Prime Minister Boris Johnson is planning to call a General Election in the days following the UK’s departure from the EU on October 31st. If this were to be the case, Parliament would be dissolved on October 11th, with an election held on November 7th at the earliest.

As MPs only return on September 5th, the time for negotiation would be narrow. It could be Johnson’s intention, that rather than proroguing Parliament, he could simply choose to call an election. If this were done so that the 31st October deadline fell within the time that Parliament has been dissolved, there would be no MPs to debate how to stop no-deal.

This plan could be both extremely foolhardy and brilliant depending on how confident Johnson is of winning an election. The opposition Labour Party would be left in an invidious position since it wants an election, but the timing of a vote could put them at an extreme disadvantage.

What would be the grounds on which Labour would campaign? Would it promise to reverse a decision taken by the people? It was also voted for by the House of Commons when it invoked Article Fifty of the Treaty of Lisbon.

As for the Government, their message would be simple. “We have carried out what we were elected to do, now re-elect us to deal with the consequences.”

The financial markets, taken a little by surprise, sold Sterling on the back of the rumour but failing any follow-through, it rebounded a little, later in the day.

It fell to a low versus the dollar of 1.2095, closing at 1.2141. Against the euro, it traded down to 1.0792. It eventually closed higher on the day at 1.0847 having opened at 1.0842.
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China’s “shot across the bows” so far unheeded

This has been a very good week for Beijing and not such a good one for Washington. Judging by the reaction or lack thereof from President Trump’s Administration, Messrs Mnuchin and Kudrow are more than a little nonplussed by Beijing’s actions.

The fact that the Chinese currency was fixed at a stronger level following being allowed to fall below the psychologically important level of 7.00 to the dollar means clearly that President Trump’s rhetoric over currency manipulation is not appreciated in Beijing.

There has been no official comment from either side which probably means that the whole situation is being taken very seriously. It is interesting that the escalation of the trade dispute characterized, so far, by tit-for-tat tariffs added to each other’s imports of goods from the other.

Until Washington responds there is no way of knowing just how the Chinese “warning” is being viewed. It could be that China sees the cutting of interest rates last week by the Federal Reserve as an attempt to set the path for rates lower and in turn weaken the dollar. Were that to be the case, China let it be known that it again prepared to match the U.S. “blow for blow”.

Until the market picks up again following the holiday season and the market has time to understand any response or comment from Washington, it is probable that the dollar will remain rangebound.

Yesterday, the dollar index fell to a low of 97.42, closing at 97.58.

Euro in a state of inertia until global trade squabbles end

It is perhaps ironic that the one thing that the “new” European Union was supposed to protect was the share of the region’s global trade share. The fact that it may have protected its share but of a “much smaller cake“ has not been lost on analysts.

The fact that the Eurozone spearheaded by Germany has failed to grow significantly since the financial crisis must ring an alarm bell somewhere in Frankfurt regarding the structural makeup of the economy.

In the period since 2010, the Eurozone has had ten quarters of negative growth and despite growth reaching close to 3% for a couple of quarters towards the end of 2017, the spectre of a recession has rarely been far away. In fact, it could be argued that the growth at the end of 2017 was despite the efforts of the ECB.

So far this year the single currency has fallen consistently versus the dollar, with just two “up” months so far (including this month which still has time to “head south”). It is a similar story against both the JPY and CHF, supposed “safe haven” currencies that the euro had been expected to emulate.

It is quite possible that the euro, trading at around 1.1200 versus the dollar, is at something approaching fair value. It is attracting neither buyers or sellers (other than versus Sterling) and remains in the doldrums.

Yesterday, it traded down to a low of 1.1181, closing at 1.1187.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”