“Borisphobia” Hits Sterling
June 14th: Highlights
- Who would have thought a greater no deal threat would drive Sterling lower?
- Euro struggling to make ground as sellers dominate
- Dollar awaits data and FOMC
Calls for a Johnson “Coronation” gaining credibility
With the current Foreign Secretary, Home Secretary, Environment Minister, and International Development Minister all in the race, there will likely be some plum positions up for grabs.
Today sees the second ballot take place and to stay in the race, candidates need to poll 32 votes. A call for the second-placed candidate, when all others have been eliminated, to withdraw allowing Johnson to be elected unopposed is gaining ground.
Such a move would aid unity but would also side-line the Party members who didn’t get a chance to elect Theresa May either.
As it became more certain that Boris Johnson would be the new Conservative Party Leader and Prime Minister, the pound took the news badly.
A No-Deal Brexit is considered the worst possible outcome for the economy and therefore the currency and no matter what assurances he may give, that outcome is seen as more likely under Johnson than any of his opponents.
The pound fell to a six-month low versus the dollar of 1.2532, closing at 1.2542. Versus the euro it reached 1.1171 and has continued to fall overnight, making a low of 1.1142.
Should Johnson extend his lead over his opponents later today when the result becomes known at 6:00 PM, the pound will continue its journey south. Three candidates; Sajid Javid, Rory Stewart, and Dominic Raab are in danger of not reaching the “magic number of 32” leaving just three contenders.
Should that happen, tomorrow’s ballot will see the candidate in third place eliminated, leaving the final two to face the Party members. The final contender, other than Johnson, will then have to decide what he wants more, to continue on to face the Party vote or secure a high-ranking Cabinet position.
Euro facing more bad news
While it is noble to continue to try to create a monetary policy that benefits the entire region, it clearly doesn’t suit the economy of Germany, the biggest driver of economic activity and a country which drives the entire region’s activity.
Today, the ZEW index of economic sentiment will be released in Germany. ZEW is an influential Mannheim based firm which measures the level of optimism or pessimism over the German economy and reports changes on a monthly basis.
Today’s report is expected to see a fall of 5.8 following last month’s -2.1.
Inflation data will also be reported for the entire region and this will show that price increases remain benign. YoY, inflation is expected to remain at 1.2%, well below the unofficial ECB target of 2%.
With the economy stumbling and Italy continuing to provide political anguish to Brussels, the continued calls from the UK for a renegotiation of the Brexit Withdrawal Agreement will place an inordinate strain on the workings of the EU machine.
The euro fell to a low of 1.1202 yesterday, closing at 1.1209. It seems only a matter of time before the 1.1200 barrier is breached and a test of the year’s low at 1.1106 takes place.
Stronger dollar treading water
Traders are awaiting the outcome of the FOMC meeting which will take place tomorrow evening European time, followed by Friday’s industrial and manufacturing output data.
Expectations for the size of the cut in rates that will be necessary to kickstart the economy are slowly being lowered. It is unlikely that the FOMC will consider a single cut enough but when the first cut takes place possibly at the July 31 meeting the statement which accompanies the announcement will be scrupulously studied for clues as to the extent of the expected cuts.
This week’s press conference will carry additional interest since the Fed’s projections for the summary of economic projections will be released. These projections are the Fed’s best guess on how they see the economy performing for the next year and will provide a solid indication about what is needed to keep GDP on track.
With the 2020 Presidential election race beginning in earnest in H2, the last thing a sitting President needs is a weakening economy although the present incumbent is sure to try to place the blame elsewhere. President Trump has been vocal in his criticism of the Fed hiking rates last year, although it was his own tax cuts which created the background need for higher rates.
It is unlikely that the present slowdown will last any longer than the end of the year depending on how the Fed reacts, so the candidates will be presented with something of an economic level playing field once the race starts to hot up.
Later today, data for housing starts and building permits will be released but these will provide more background information than market-moving excitement.
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.”