A series of unfortunate miscalculations
Today's news headlines:
- ‘Draghi faces biggest-ever pushback as ECB’s core resists’. European Central Bank Chief Mario Draghi faces resistance to continuing bond purchases this month following outright opposition from France, Germany, the Netherlands, and a hawkish tone from Austria. Draghi’s dilemma puts the ECB’s credibility at risk as any policy decision should ideally be unanimously agreed. (Bloomberg)
- ‘US and China agree to restart trade talks next month’. The US and China will continue face-to-face negotiations according to statements from both nations. Ahead of the discussions, deputy-level meetings will take place ‘to lay the groundwork’ for more meaningful progress, according to a spokesperson for US trade representative Robert Lighthizer. Asian and US equity markets climbed on the news. (Financial Times)
It’s been a tumultuous week for Boris Johnson, certainly his worst since taking office six weeks ago, and recent developments have left his government on the brink of collapse. Yesterday, UK lawmakers subjected Johnson to his third defeat in just two days, firstly by forcing the PM to seek a three-month delay to Brexit if no deal is agreed and secondly by rejecting his call for an October 15th general election. Sterling’s reaction was positive, jumping back above 1.22 against the Dollar and 1.11 against the Euro as markets view the developments as reducing the chances of a no-deal EU-exit. As a pioneer of Brexit, Johnson’s strategy since assuming office has been a series of miscalculations based around his ‘do-or-die’ pledge to take the UK out of Europe on October 31st and has led to him losing control of his Parliamentary majority.
This week, Johnson ejected 21 Tory rebels from the Conservative party after they joined forces with the opposition to vote against him. The PM then called for a snap general election to restore a working majority but failed to gain the two-thirds support needed. As a result, Boris has made the most challenging political issue, resolving Brexit, far harder and could find himself trapped in office, compelled to seek a further delay to the withdrawal date. Meanwhile, EU negotiations have gone nowhere, with the bloc unwilling to concede to Johnson’s demands to ‘ditch’ the Irish border backstop agreement and the PM unable to come up with a suitable alternative.
Bottom line: The decision to leave the EU was meant to give the UK the freedom to seek its own political and economic destiny. Three years later and the nation is paralysed, on the brink of recession, with services, manufacturing, and construction activity all declining. We still see the most likely outcome as a general election in 2019; however, it’s unclear whether it can be pushed through before October 31st.
Cable has rallied from multi-year lows just two days ago, back to the 1.22 region as the chances of a no-deal Brexit fade away. This morning, the Pound Index nudged above its 50-day moving average, a key level of resistance for the currency. A weaker Dollar has helped the pair’s move in recent sessions as the Dollar Index has fallen from the year-to-date highs reached on Tuesday.
A combination of a stronger Euro and Pound has meant moves in GBP/EUR have been relatively subdued in recent sessions, but moving higher nonetheless. The pair broke through the 1.11 level overnight having hit resistance at this figure multiple times this month.
A weaker Dollar has helped the pair climb above 1.10 again following a rebound from multi-year lows of 1.0926. Low volatility has plagued the currency pair for much of the year, and it doesn’t look like this will change anytime soon.