Back where we started

Today's news headlines:

  • ‘Corbyn faces angry, bleak and distraught meeting of MPs’. Jeremy Corbyn was treated with anger and hostility by members of the Labour party following their worst election result in 80 years. The Labour leader had tried to blame Brexit and the media for the poor performance but eventually took responsibility for the result at the weekly meeting of the Parliamentary Labour Party. Many candidates spoke of the lack of central support they received, while others criticized the content of the Labour manifesto. The race to succeed Corbyn will begin in January, and the newly appointed leader will be keen to represent a clean break from this disastrous era. (Financial Times)
  • ‘On eve of expected impeachment, Trump lashes out at Pelosi, Democrats’. Yesterday, the US President wrote a six-page signed letter, accusing the Democrats of pursuing an ‘illegal, partisan attempted coup’ by seeking his removal from office. Trump’s letter, addressed to House speaker, Nancy Pelosi, came on the eve of his expected impeachment for asking Ukraine to investigate political rival, Joe Biden. The Democratic-controlled House is expected to pass two articles of impeachment, but no President has ever been removed from office via the impeachment process. (Reuters)

Reading the baseline

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.

GBP/USD

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.

GBP/EUR

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.

EUR/USD

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.