24 July 2019: Johnson wins, Sterling dives

Johnson wins, Sterling dives

July 24th: Highlights

  • Boris Johnson set to be named Prime Minister
  • Budget deal drives Dollar higher
  • Euro falls as market awaits data and ECB

Brexit just got interesting!

Over the past three years, everything that has happened in political circles in the UK has been driven by Brexit. There has been a sense of inevitability at every turn. Theresa May accepted a poison chalice when she chose to become Prime Minister in the immediate aftermath of the referendum. Having voted to remain herself it was a recipe for disaster that she should try to negotiate the UK’s departure from the EU while believing that the result of the referendum was wrong.

The process of the UK’s departure from the EU has been an unmitigated disaster from day one. While negotiations were taking place, Brussels almost immediately gained the upper hand, delivering its demands to the UK in an almost take it or leave it scenario.

Parliament didn’t help by voting, overwhelmingly, to trigger Article Fifty of the Lisbon agreement which not only set the process in motion but gave it a definite timescale.

As soon as the draft withdrawal agreement was published last November it was obvious that we would arrive at where we are today. Parliament is deadlocked, only able to agree on what it doesn’t want. Now Boris Johnson is set to take the “Brexit reins”. If he has nothing else, he has overwhelming confidence that the UK will leave the EU on October 31st no matter what.

Of course, if he is unable to come to an agreement with Brussels and no deal looks likely, it is entirely possible that the UK could be plunged into a General Election but it would be a very brave Conservative MP who voted against his own party in order to make that happen.

Johnson’s strong stand over the Irish Backstop will ensure that the DUP remain onside so it will be only rebellious MP’s who could bring the “brave new world” crashing to the ground.

The financial markets were not impressed with Johnson’s victory as the pound fell to a low versus the dollar, of 1.2417, closing at 1.2438.

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U.S. avoids default as a two-year budget deal agreed

With the entire market looking towards Fridays Q2 GDP data to be followed by next week’s FOMC meeting the perennial budget deficit argument had been almost completely overlooked.
It appears that the annual Government shutdown due to lack of funding is set to be avoided this year as President Trump has managed to come to an agreement with Congress that will keep this well-oiled machine operating.

Trump had been keen to avoid any shutdown this year since it would have happened at a critical stage in his re-election campaign, so he has held back on any major spending until after the election. Indeed, he is rumoured to have instructed the administration to start to look at ways of cutting Federal spending in advance of November next year.

Traders were encouraged by the new-found harmony, but it may be short-lived if Jerome Powell fails to play ball next week.

Powell is highly unlikely to retain his job should Trump be re-elected, so he is unlikely to go out of his way to curry favour with the President.

It will be a major surprise if there is anything other than a 25bp cut in short term interest rates next week. There is insufficient support among the members of the FOMC for a 50bp cut while there is a feeling that some insurance is needed should the economy falter in Q3.

The dollar rallied following the budget announcement, with the index reaching 97.74, having surged through resistance between 97.40 and 97.50. It closed at 97.69.

Euro falls as dollar surges

The euro is being buffeted from all sides. Its role as a makeweight in the dollar index has seen it break its support at 1.1200 today and traders now appear eager to test the next support at 1.1105.

Tomorrow’s PMI data for both Germany and the Eurozone may give them the opportunity they crave.

While there is a little optimism that the data from Germany may be a little better than expected there is still a pall of gloom hanging over the region. German manufacturing is expected to have expanded a little reaching 45.3 from 45.00 last month. Overall Eurozone manufacturing is expected to be flat at best, unchanged at 47.6 although there are concerns to the downside.

Whether looking at Germany or the region as a whole the data has a long way to go before it reaches the 50.00 level where it begins to expand.

The market is prepared for an ultra-dovish statement from Mario Draghi following the ECB meeting on Thursday. He is unlikely to promise that a rise in inflation is “just around the corner” and he could possibly move the target closer to reality possibly cutting from 2% to 1.5%.

The euro made a fresh six-week low versus the dollar, reaching 1.1145 and closing at 1.1150.

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.”