After all the highs and lows of this last UK election, markets have ended up more or less where they started, with one qualitative difference: there is a way forward via Johnson’s majority. From that perspective, the Pound sell-off following some pretty run-of-the-mill Brexit remarks is nonsensical. It does, however, reveal the degree of Sterling vulnerability and implies any subsequent forays into a higher trading ranges are due more scrutiny.
On Monday, UK Manufacturing and Services Purchasing Managers’ Index data came out showing contractions, at the bottom of their respective ranges. As we mentioned earlier this week, one might discount these data points since they measure sentiment, which is sensitive to political events and may not objectively describe sector dynamics. Today’s collection of UK inflation data will provide a more ‘facts and figures’ reading of domestic demand in the UK economy and allow a better view of the speed of underlying growth.
Bottom line: The market expectation is that inflation will decline marginally, but the level is still relatively near the Bank of England’s target rate of two percent. Given that the UK was running above-target inflation for most of 2017-2018, there is a symmetry argument to be made that the Monetary Policy Committee might allow the rate to undershoot in subsequent periods. Ultimately it will depend on a constellation of data points and to some degree the policy persuasion of the incumbent Governor (due to be announced any day now) to determine what the next policy move may be.
Yesterday, Sterling’s trade-weighted Index sustained another day of losses to leave the Pound trading back below pre-election levels. This means that the currency pair has now lost over 3.0% of its value since Thursday evening on fears that an eventual no-deal could be the prescribed method of the UK leaving the EU. This morning, Sterling is trading around the 1.31 handle against the Dollar, reflecting little lasting positivity over Boris Johnson’s Brexit schedule.
In the same fashion, Sterling has extended losses back below pre-election levels against the common currency. We’re yet to break below the upward trend for the pair since mid-October, with a fall to around the 1.1650 level being necessary to reinforce a more negative outlook for the pair. German Ifo data was positive this morning, helping to support the Euro against its trading partners.
The trade-weighted US Dollar Index moved higher in yesterday’s session, as continued trade uncertainty between the US and China increased the safe-haven appeal of the Greenback. The positive German Ifo data released earlier has helped support the Euro back towards the 1.1140 mark against the Dollar, and we see the pair continuing to trade broadly in this range, with risks tilted to the downside.