A glint of silver linings

​​​​​​Today's news headlines:

  • ‘Boris Johnson warned by Tory rebels: ditch no deal or face fight for survival’ Having just survived a pre-emptive test of his ability to gather a majority, Boris Johnson is set to win the leadership contest for number 10 and enter a whole new type of contest. Several cabinet members have already resigned in protest of Johnson’s no-deal path and several more are intending to join them, unless there is a change of tack. (Guardian)
  • ‘White House and Congress reach deal on US debt ceiling’ A deal has finally been reached to increase the US Debt ceiling until mid-2021. Part of the agreement is $320bn in additional spending for both defence and non-defence projects. (Financial Times)

No easy solution for the bank

Not so long ago, the Bank of England were forecasting higher interest rates on the provision of an orderly Brexit. Conditions are less simple now; markets are pricing in monetary policy easing, given the increased potential for Britain to crash out of the EU on Oct 31.  In a Bloomberg interview, BoE policy maker Michael Saunders noted that Brexit uncertainty has led to a divergence between official BoE forecasting and policy makers decisions. Saunders, one of the bank’s most hawkish members, also commented that the most recent projection of above-target inflation did not prompt him to vote for higher rates. Saunders maintained that rates would probably rise over time if a deal is secured, but a chaotic departure would require the BoE to use the policy tools at their disposal to support the economy.

Bottom Line: GBPUSD is thus far supported around the 1.24 level. However, the prospect of no-deal fatalism espoused by Boris Johnson, the likely victor of the Tory leadership contest, has some analysts forecasting sterling depreciation by 5%.  In that case, the BoE may need to reduce rates and pull out the QE tool chest to avoid recession.

Trump’s news plan

This year’s earnings season, a consistently-anticipated market event, will be particularly important because of recent concerns of growth deceleration.  With US stock markets at all-time highs, corporate earnings releases will provide investors with necessary clues about the resilience of currently asset prices. The US is the latest economy to manifest this concern, as this year central banks around the world have turned dovish amid concerns of slowing global growth. Unfortunately, the effectiveness of reducing already low interest rates is increasingly dubious. This has led many to call out for fiscal policy to lead the charge, now that central banks have arguably exhausted their main tools.

Yesterday, Donald Trump announced a deal to boost government spending which should take pressure off the Fed and relieve nervous investors ahead of earning season. When Trump took office, one of his main policies was to increase spending. Few would disagree that Trumps Tax Cuts and Jobs Act of 2018 provided a meaningful boost to the economy, however, the positive effects of his policy have largely died out. Regardless of the outcome, a new fiscal boost along with monetary stimulus may provide good reason to expect support for the US economy and its stock markets.

Bottom Line: At a time when central banks around the world are cutting interest rates to prop up slowing growth, a US fiscal boost in the US may cause dollar strength to persist. Given Trump’s obsession with currency manipulation and a persistently stronger Dollar, this is likely to feed trade disputes.


Since Friday the Dollar Index has been gaining strength, although this morning it has opened at 200-day moving average resistance level. There is certainly scope for the pair to fall further but that is likely to be a Sterling led move. Everyone is watching for the 11:45am announcement of the Tory leadership contest.


The Euro, much like the Pound, has steadily moved to the bottom of its trade weighted range. Today is another quiet day on the economic data front so the new UK PM announcement is likely to be the key driver of any action today.


The pair sits at the bottom of a 6-week trading range and has the potential to move further, since there isn’t particular support for the common currency heading into tomorrow’s EU Purchasing Manager Index releases. There are few minor US data points this afternoon, but most markets are monitoring corporate earning releases for signs of weakness.