Boris Johnson moved into full-on campaign mode at the weekend by unveiling a tax-cut plan, stiffening his stance on Brexit, and firing shots at Brussels over the current deal. Johnson said he would scrap the Irish border backstop and pledged to take the UK out of the bloc on Oct 31st – even if no agreement is in place—withholding the £39bn owed to the EU until a more favourable deal is offered. A no-deal Brexit has been a more prominent fear for markets since the Bank of England (BoE) predicted last November that the UK economy would shrink by 8.0% and the Pound would lose a quarter of its value. Still, this can’t be viewed as a deterrent; political objectives often trump (pun intended) economic rationality.
Bottom line: Johnson’s plan to take the UK out of the EU without a deal sounds great to those thinking of switching sides to Nigel Farage’s Brexit party. However, the chance of BoJo bypassing parliament to do so is slim to none. Where would that leave the UK? A general election followed by a Corbyn government? Nothing looks positive for the Pound.
Over the weekend, US President Trump backed down from an attempt to enforce migration policy by threatening trade tariffs. Trump announced the withdrawal of Mexican tariffs as the nation committed to a tougher stance on illegal immigration. Fortunately, the US-Mexico dispute proved brief, but trade with China continues to be elusive and represents a significant risk to global economic growth. China has moved further away from the negotiation table, boasting ‘tremendous’ room to ease policy, which sounds like it views a protracted dispute as the most likely outcome. Overnight the Chinese trade surplus widened by a considerable amount, driven by twice the forecasted decline in imports. That said, investors began the week with an appetite for risk assets as equity markets across the world tick higher, and safe-haven Treasuries are lower. With China’s central bank showing no signs of concern for its economy over the trade dispute and the US backing down from recent Mexican tariff threats, weakness now appears on the US side of this trade game.
Bottom line: Risk appetite grows as the US-Mexico trade front is resolved, although trade tensions with China remain. A more severe deterioration in the Chinese economy may be needed for the nation to relax its stance on the trade dispute. The Dollar Index remains at the bottom of its one-month range and the Euro Index at the top. It is unclear whether the change in narrative is likely to upset the weaker Dollar trend since the turn of the month.
Since the turn of the month, the trade-weighted Dollar has weakened, reaching the 200-day moving average. Given the change in the trade tension dynamic this weekend, this is likely to be a level of support for the Greenback. For its part, the Pound has barely moved in the past week, but today’s Manufacturing Production figure is one to watch.
The Euro has steadily climbed higher since the beginning of the month, coinciding with the Dollar’s decline. Just shy of the 200-day moving average on a trade-weighted basis, it seems likely to continue the trend.
Since the start of the month, a combination of EUR appreciation and a Dollar sell-off has allowed a path of reasonable gains for EUR/USD. However, the story has changed somewhat over the weekend, and the Dollar might be stabilising, leaving any further gains driven by Euro appreciation alone.