Toxic politics

View from the Trading Desk:

So here we are, two out of three debates into a Conservative leadership race, with little clarity about who will become the next Prime Minister. What’s certain though, is that the new leader will inherit one of the most precarious economies in recent memory, with economists judging a 45% chance of a UK recession in the coming year. It’s little wonder that all the remaining candidates have sought to forge an independent fiscal stance on how to tackle the cost-of-living crisis. It’s probably fair to say that both Kemi Badenoch and Tom Tugendhat are unlikely to make this week’s final two-candidate shortlist, even though both have brought a refreshing perspective to the televised debates.

That leaves us with front-runner and former Chancellor Rishi Sunak, Foreign Secretary Liz Truss, and former Defence Secretary Penny Mordaunt battling it out for the top spot. Sunak and Truss have clashed repeatedly in the first two debates, with Sunak accusing Truss of ‘fairytale’ policies and branding her £34bn tax-cut plan with higher borrowing as ‘socialism’. It may have worked; a snap poll last night found that Sunak had won the second debate with almost a quarter of the votes. Still, the problem remains that Sunak just isn’t as popular with grassroots Conservatives as he needs to be to win the final run-off, with many seeing him as a tax-raising moderate, an opinion hard to debate. Truss, for her part, laid into the former Chancellor for his record on growth in his time with the Treasury, but her blunder that the Bank of England should more closely replicate the Bank of Japan likely lost her some credibility.

Mordaunt is more of an unknown quantity, with a lack of cabinet experience calling her competence for the top job into question. A victim of her meteoric rise, she’s been dragged through the media for her record on gender self-identification, and one Minister argued that she was ‘not serious’ about the economy. Yet, while she has failed to sparkle in the first two debates, there’s a lot to like in a state-schooled Conservative MP from a grittier area than the norm.

Bottom line: One does wonder whether voting members have their priorities in order. In two years or less, we’ll be in the run-up to the next general election, meaning they need to choose the candidate with the best chance of re-election. For stewardship of the UK’s economy, one might wager that Sunak would be best placed. However, in a direct contest with Truss, we can only see one winner.

The week ahead


Amid the developments in UK politics, the Pound Index has bounced today as Michael Saunders of the Bank of England suggested interest rates could rise past 2%. A 50 basis-point rate hike at the August meeting has been priced in by markets following some forceful comments by BoE Governor Andrew Bailey last week, putting more aggressive moves firmly into play. House prices in the UK may continue to rise for the rest of the year as the supply and demand imbalance persists.  

  • Bank of England Governor Andrew Bailey is due to speak at the Mansion House Financial and Professional Services Dinner tomorrow.
  • The UK Consumer Price Index is projected to reach 9.3% year-over-year in June, with the latest print scheduled for release at 7:00AM on Wednesday.
  • The GfK Consumer Confidence Index is predicted to fall to -42 in July from -41 in June.
  • Closing out the week, preliminary Manufacturing and Services Purchasing Managers’ Index releases for July are expected to read 52.0 and 53.0, respectively. 



Following multiple tests of parity, EUR/USD broke through this significant level to reach a low of $0.9954 last Thursday, only to rally back above the $1.01 handle this morning as the US Dollar pares gains. All eyes will be on the European Central Bank this week as markets expect the first rate hike for 11 years. A 25 basis-point hike is fully priced in; however, the case for a larger move is not going away, with many economists holding the belief that it’s too little too late. A miss on PMIs at the end of the week could reignite a move lower in the common currency, with the central bank decision the focal point for the week.       

  • The Eurozone Consumer Confidence Index is expected to decline to -24.9 in July versus -23.6 in June.
  • The European Central Bank will meet on Thursday to provide its latest interest rate decision; markets are predicting a 25 basis-point hike.
  • German preliminary Manufacturing and Services PMI releases for July are forecast to come in at 50.7 and 51.4, respectively.
  • Eurozone preliminary PMI releases are also due on Friday. Manufacturing and Services are expected to print 51.0 and 52.0 for July.



The US Dollar Index has fallen 0.50% so far today as traders scale back on expectations of a 100 basis-point interest rate hike by the Federal Reserve. US inflation hit 9.1% in June, the highest since 1981. However, softening of future inflation expectations in the latest University of Michigan Consumer Sentiment report could be an early sign that demand is slowing as buying patterns adjust to a higher price environment. It’s hard to see past a stronger US Dollar in the coming months as interest rate differentials widen with other G10 currencies. The rate at which demand retreats will be pivotal in determining if the Fed can achieve a soft landing.  

  • Federal Open Market Committee (FOMC) member Lael Brainard will be speaking on Tuesday at 7:30PM.
  • The Philadelphia Fed Business Outlook for July will be released on Thursday, with analysts expecting a 0.0 print.
  • US Unemployment Claims are forecast to be 240K for the week ending July 16th versus 244K a week prior.
  • The US will also post preliminary Manufacturing and Services PMI releases on Friday, with projected readings of 52.0 and 52.5.


If you'd like to discuss your foreign exchange requirements with one of our currency specialists, call us on +44 (0)20 3465 8200.