Change on the agenda

​​​​​​Today's news headlines:

  • ‘Sajid Javid resigns as UK Chancellor of the Exchequer’. After refusing to relinquish control of Treasury to Boris Johnson, Sajid Javid resigned as UK Chancellor yesterday after only eight months in the role. Javid was immediately replaced by Rishi Sunak, a close ally of the Prime Minister, fuelling market expectations that the government will ramp up fiscal stimulus in March’s budget. (Financial Times)
  • ‘Eurozone economy set for slowest growth in 7 years’. The German economy flatlined in the fourth quarter of 2019, producing zero growth against an expected 0.1% increase. Data published later today is also expected to reveal the slowest rate of growth for the Eurozone since the bloc’s debt crisis seven years ago. Recent poor data in Retail Sales and Industrial Production have increased fears of an impending recession in the bloc and focus will now shift to the degree of disruption caused by the coronavirus outbreak. (Financial Times)

He's out

In a surprising shakeup at number 10, Chancellor of the Exchequer Sajid Javid, resigned after Boris Johnson restructured the Treasury decision-making apparatus in a power grab. The PM’s chief advisor, Dominic Cummings, has led him to rewire decision-making so that a group of joint Number 10 and Number 11 advisors, answerable to the PM, would run Treasury policy. In that case, Mr Javid would have no real ability to check Johnson, which is historically a key function of the role. Treasury Chief Secretary, Rishi Sunak, has been brought in to fill the void, but his lack of experience and the new structure of the role make it a political gamble. This constitutes a big win for Cummings who is very much a government outsider but has proved his skill throughout Johnson’s bid for Number 10. Even though quite a few of Cumming’s policy positions are counter to the mainstream, we might yet witness an unprecedented change of government policy.

Bottom line: Despite the upheaval, Sterling gained based on the proposition that the UK government would be untethered from fiscal rules and large, stimulative spending would ensue. We think that is rather reductive, but certainly, you may not see policy changes veer from the norm. Mr Cummings is after all opposed to HS2—the budgetary nightmare that is the high-speed rail line to the north—and in favour of a mansion tax, so it seems social change is on the agenda as well. Given Mr Cummings track record so far, he might even be the agent of change the UK has resisted for decades.

GBP/USD

Yesterday, Boris Johnson’s Cabinet reshuffle prompted Sterling to rally significantly as Rishi Sunak replaced Sajid Javid as the UK’s Chancellor. Against the US Dollar, the Pound moved almost 1% higher on the day as markets predicted a substantial loosening of the fiscal purse strings. The rally eventually found resistance at the 50-day moving average and has settled just below that level this morning.

GBP/EUR

The Euro’s trade-weighted index has fallen over 2% in the month of February as weak economic data continues to present itself. This has helped the GBP/EUR currency cross to pass the significant 1.20 interbank level. We’ll be watching to see if the pair holds above that level in today’s trading session after some early signs of a retracement this morning.

EUR/USD

The currency cross is languishing at lows not seen since early 2017 as a perfect storm of market conditions has led to a steep decline for the Euro. Worse-than-expected data and new cases of the coronavirus will continue to drive sentiment in the near-term. US Retail Sales and the University of Michigan Consumer Sentiment data are due out later and could provide some meaningful price action.