23 July 2019: No-deal now the market’s best guess

No-deal now the market’s best guess

July 23rd: Highlights

  • Sterling falls as Johnson win almost certain
  • Central Bank’s hold Dollars fate in their hands
  • Euro hoping for stimulus but wants improved data just as much

Johnson’s “coronation” is unlikely to be without casualties

After what has been an interminable wait, the result of the Conservative Party’s Leadership Contest will be announced later this morning. There have already been some high profile “casualties”, including the Chancellor of the Exchequer Philip Hammond who plans to resign if Boris Johnson wins.

Due to the fact that Johnson is determined to show a united front and demand a pledge to support his Brexit plans, there will be some interesting choices to fill the Front Bench Cabinet positions. It is expected that one of his rivals for the leadership, Sajid Javid will remain the Home Office while a staunch Johnson supporter, Liz Truss may take over from Hammond.

Arch Brexiteer Priti Patel who resigned as International Development secretary in 2017 is tipped for a return. It is likely that Jeremy Hunt will remain as Foreign Secretary although his Brexit credentials may be tested should Johnson need to get tough with Brussels.

Another beaten contestant, Dominic Raab could return to his old job of Brexit Secretary now that he will have a more solid mandate.

The pound is clearly in the throes of a no-deal scare despite the House of Commons voting last week to make such an event (almost) impossible.

It remains to be seen just how radical Government MPs would be if no-deal becomes a certainty. Would they be sufficiently incensed to risk their jobs in a General Election?

Between now and Parliament rising for the summer recess there is likely to be some unprecedented events as Johnson sets about reaching a deal with Brussels.

Yesterday, the pound fell versus the dollar and the euro. Against the dollar it reached a low of 1.2455, closing at .2475. Versus the single currency, it fell to 1.1110 but closed just six pips below the open at 1.1130.

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Central Banks to control the dollar through the summer

This week’s ECB meeting followed by the Fed meeting next week are likely to both be significant for the dollar. If the ECB is extremely dovish and finds a way to inject further accommodation into the Eurozone economy, the single currency will crash through support at 1.1200 and this will mean that unless the FOMC cuts by 50bp next week and signals that this is the first of a series of cuts, the dollar index is set to break considerably higher.

There is the small matter of the second-quarter GDP data which is due for release on Friday which could add to the tone for the dollar, strengthening the effect of the ECB’s actions.

We have three significant market moving events over the next week or so, the chances are that they will all drive the market in one particular direction.

Activity data will provide a precursor for the ECB while there is little other significant data in the U.S. prior to the GDP. Existing Home Sales are expected to be flat while Producer Prices tend to be so affected by single big-ticket items that the data is often unreliable.

President Trump has so far failed to react to increasing tensions in the Gulf other than some rhetoric about Iran avoiding raising the stakes much further.

The dollar index continued to recover yesterday as hopes for aggressive rate cuts continue to fade. It reached a high of 97.30 and closing within one pip of the high. There is continuing resistance between 97.40 and 97.50 which will need the “stars to be aligned” in order to be broken.

ECB holds the fate of the euro but may not be able to cling on

As traders in Europe look forward to their annual vacations it is becoming ever more likely that when they return to their desks, the single currency could be trading significantly lower.

The tone for the ECB will be set by the Manufacturing PMI data for both Germany and the entire region. The only factor keeping the Eurozone from falling into recession is the fact that services output is growing at a little above trend and that is supporting overall activity.

Mario Draghi is running out of opportunities to “pull a rabbit from the hat” as his time as ECB President runs down. Christine Lagarde will bring a different and potentially more charismatic approach to the role but there is a feeling that what is needed now is more pragmatism and less political posturing.

The relationship between the Central Bank and the EU’s Governing bodies will doubtless improve but that may be due to negotiation rather than the new Commission President realizing what needs to be done.

The single currency continues to strengthen against the pound, but the effect of a no-deal Brexit will hit the EU hard, although it will hit the UK harder. It may be that Ursula von der Leyen will need to show a little pragmatism herself to push through the fiscal reforms that are badly needed to help the region with its structural difficulties.

She is slated to take over on the day the UK leaves the EU. If Johnson wins today, there could be a lot of scared faces in Brussels on Halloween.

Yesterday, the euro remained above the strong support it has at 1.1200, reaching a low of 1.1206 and closing at 1.1210.

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.”