After winning a sizable Parliamentary majority in Thursday’s UK election, Boris Johnson must now use his new-found mandate to keep the country together. The steady move toward Brexit over the last two years has only made our northern Scottish residents more determined to hold a second UK referendum. The question is whether Johnson’s more inclusive policies will win over the electorate or whether it’s too little, too late. In the meantime, today’s UK Manufacturing and Services Purchasing Managers’ Index survey—which recorded responses before the election—is likely to show a continuation of the contractionary readings and is therefore likely to be discounted.
As we mentioned on Friday, the devil is in the details of the US-China phase one deal, and it seems hardly worth the paper it’s written on. The consensus view among market participants appears to be that this deal simply rewinds the clock to summer 2019 and does not include any substantive, structural reforms. And given how little has been agreed, it doesn’t support the argument that the US and China will enter into phase two of negotiations any time soon. More likely, the Chinese will stall in hopes that either impeachment or the US election will remove Trump from office. Most believe a guilty verdict in the impeachment hearings will not result in his exit and given his ‘outsider’ persona, it will do little to diminish him in the eyes of his base. The election is more difficult to call because it’s much too early to see if any of Trump’s political opponents have sufficient support to mount a challenge to his nationalist agenda.
Bottom line: The Dollar retreated on the trade deal news but has since regained most of that ground. Overnight, Chinese Industrial Production and Retail Sales surprised to the upside, which suggests some of the People’s Bank of China’s stimulative measures are working. Sterling has also lost about half of the original upside following the Tory majority win, but it can be reconquered if the momentum of this election win translates into Brexit speed and clarity.
On Friday, the Pound gave back some of its post-election gains, as it pulled back to just above 1.33 against the US Dollar. This now appears to be a level of support on the downside as markets anticipate a speedy and somewhat ‘soft’ Brexit in the coming weeks. Most technical indicators point towards further Sterling gains in the near-term, and it should be a big week for the Pound with plenty of economic data to come, beginning with Manufacturing and Services PMI’s today.
This morning, Sterling is settling around the 1.20 mark against the Euro as post-election Brexit hopes continue to support the Pound. We could see another run towards last week’s almost three-and-a-half-year highs for the currency pair as the outlook for the UK now harbours a sense of certainty.
This morning’s downbeat French and German PMI data have weighed on the common currency, bringing it back below the 1.1150 mark against the Greenback as hopes for a manufacturing rebound in the region stall. However, the currency pair is still trading at the higher end of its recent trading range, and the 50-day moving average remains above the 100-day equivalent. This would point toward further near-term gains for the Euro.