Post-election Sterling appreciation receding

Today's news headlines:

‘Trump approves US-China trade deal to halt Dec. 15 tariffs’ – Trump has signed off on a phase-one deal, effectively removing the threat of the December 15^th tariffs, which would have hit $160 billion worth of consumer goods. Global stocks and bond yields climbed on the news. An announcement is expected Friday. (Bloomberg)
‘UK assets unleashed as Tory landslide sweeps through markets’ – UK assets soared after the Conservatives gained a majority in Parliament, with the FTSE 250 reaching all-time highs and the Pound reaching 20-month highs on a trade-weighted basis. (Bloomberg)

Turning over a new leaf

This morning we woke to two market-positive news headlines; Boris Johnson trounced the opposition in the UK election securing a 47-seat majority and President Trump has signed off on a phase one deal with China. Both the Pound and Euro jumped on the news and the Dollar sold off below previous lows.

Before we get too far ahead of ourselves, let’s look at some indications of enduring market impact. In the UK, the fact that Johnson has won a clear mandate certainly hints that an end to the interminable Brexit divorce is imminent. There isn’t a UK resident who won’t be happy to have it behind them, even if they disagree with the outcome. The majority also provides an improved UK negotiation position in the subsequent trade deliberations. On the face of it this is also positive, provided this doesn’t embolden Johnson to ‘go for broke’ in his stance, otherwise it increases the duration of the negotiations and accompanying uncertainty.

From the US perspective, the devil was always going to be in the details and at this stage those are lacking. The market consensus has for some time been that a deal which exchanges some basic agricultural purchases for a moderation in tariffs is worth little. This sort of deal simply limits additional tariffs but doesn’t address any substantial points, and therefore should have only a modest market impact. The necessary sign is a clear willingness from the Chinese contingent to address structural issues which prompted the dispute at the outset. It’s not clear whether Mr Trump’s vocal zero-sum approach to trade leaves the Chinese a way to make concessions without losing face. It may very well mean a basic level deal is the only deal possible under the current administration.

Bottom Line: Post-election Sterling appreciation is already starting to recede. The key to further appreciation is the degree to which today’s resounding win for the incumbent manifests in a speedy Brexit deal passage.

GBP/USD

The pair reached highs of 1.3514 overnight after exit polls suggested a landslide victory for the Tories in yesterday’s election. On London open today, Sterling dropped off, settling around the 1.34 level. A weaker Dollar has seen Sterling’s climb in recent weeks, but a rebound threatens to weigh on the pair in the near-term.

GBP/EUR

Sterling’s overnight climb following the general election exit poll sent the cross-currency pair to 1.2082, before settling back below 1.20 on London open this morning. The Euro also traded higher on the news, making the net effect on GBP/EUR than the Pound against other majors.

EUR/USD