Another snap election?

Today's news headlines:

‘Carney has last chance to send no-deal Brexit message to public’. On Wednesday, Bank of England Governor, Mark Carney, will appear before the Treasury Committee in what could be his last opportunity to address MPs before Brexit publicly. The event provides an opportunity for the Bank of England to reveal the results of an updated worst-case scenario model to include a no-deal Brexit – an outcome that was previously left out of the central bank’s models because it wasn’t deemed the most likely outcome. (Bloomberg)
‘China, US struggle to set meeting as tariffs erode trust’. After the US tariffs on Chinese consumer goods took effect over the weekend, Beijing requested to delay the tariffs, which was rejected by Washington. This latest development means a September trade meeting has become less likely, but not impossible. (Bloomberg)

On a tightrope

The battle between the UK’s Parliament and government is set to continue today as MPs try to pass legislation that would force Boris Johnson to delay Brexit again in the event of no-deal. Johnson spoke outside 10 Downing Street last night in a desperate plea to lawmakers, not to undermine Britain’s negotiating position with the EU by taking the threat of a chaotic split off the table. Overnight, reports have also emerged that the Prime Minister will call a snap October general election if he loses tonight’s crucial vote in the House of Commons. It’s clear to see why: Boris will lose his only point of leverage if MPs force him to delay and his only hope will be to gain a Parliamentary majority that won’t rebel against him.

Sterling continued its slide on the back of the news, falling below 1.20 for the first time since January 2017 as markets fear the possibility of a pro-hard-Brexit alliance coming to power. According to FX researchers at Credit Agricole, investors are beginning to price in a coalition between the pro-Brexit Conservatives, Brexit Party, and the DUP that would wield power to take Britain out of the EU with or without a deal. Sterling’s outlook throughout today could deteriorate further as the increased likelihood of an election will exacerbate the GBP sell-off.

Bottom line: It was initially thought that the prospect of a general election would be Sterling positive; however, that no longer seems to be the case. The effect of the recent developments has ramped up the probability that the UK leaves without a deal on Oct 31st, and we’ve seen that reflected in both the slide in Sterling and higher Option volatility over a two-month tenor.

GBP/USD

The pair continues its downward trend with heavy selling pressure for the Pound following heightened fears of a no-deal Brexit. Cable broke through 1.2000 on the London open hitting lows of 1.1959 before settling around the 1.20 handle. The US Dollar Index has extended its climb of two-year highs.

GBP/EUR

The pair fell to 1.0950 this morning due to GBP weakness—a level not seen since August 22nd 2019. A volatile Pound can be expected throughout the day and will likely be the primary driver of the pair as Brexit headlines emerge.

EUR/USD