Theresa May’s confirmation as PM pushes Pound higher

Yesterday’s markets

12th July 2016

  • EUR Eurogroup Meetings
  • USD FOMC Member George Speaks
  • AUD NAB Business Confidence: 6
  • USD FOMC Member Mester Speaks

Yesterday’s economic data was sparse as no high tier data was released. However, UK politics took center stage as we saw Andrea Leadsom drop out of the running to become the new Tory party leader. This left the last contender Theresa May, to now become the new Prime Minister. The Home Secretary will become the first female PM in 26 years and in a press conference yesterday, Theresa May vowed to make Brexit a success, after being a member of the campaign to keep Britain in the EU. 

On the back of the developments, David Cameron was quick to announce that May will replace him at no.10 as soon as Wednesday. This triggered a modest Pound rally as the immediate uncertainty surrounding the UK government was removed. On the opposition benches, yesterday also saw former shadow business secretary Angela Eagle, formally launch her campaign for the Labour Party leadership challenging Jeremy Corbyn. This is likely to further destabilise the UK’s main opposition party as Corbyn having lost the confidence of Labour’s 172 MPs, still remains popular with the broader party membership and intends to use all means necessary including threats of legal action to cling to power.  

The stock markets yesterday saw the FTSE100 reach an 11 month high, reaching the technical definition of a “bull market” having gained more than 20% since February’s low. It is worth noting that this isn’t the market approving the decision by the UK to leave the EU, but merely a ramification of the significant drop in value of the Pound. Although firms listed on the FTSE 100 derive most of their earnings from outside the UK, the large fall in Sterling has boosted the value of these earnings in GBP.

Today’s markets

11th July 2016

  • GBP BOE Gov Carney Speaks
  • USD FOMC Member Bullard Speaks
  • USD JOLTS Job Openings
  • NZD RBNZ Assist Gov McDermott Speaks
  • CNY Trade Balance

The main focus of today will be on the UK’s Inflation Report Hearings where the Bank of England Governor and several Monetary Policy Committee members testify on inflation and the economic outlook before Parliament's Treasury Committee. This will see the Governor of the BoE, Mark Carney and several MPC members providing in-depth insights into the financial conditions of Britain. All will be watching to see what comments are made on the future of the economy, as the break away from the EU still awaits. 

Inflation expectations have already rocketed, with 5-year break-even rates surging to 13-month highs of 2.55 per cent from less than 1.95 per cent in February. Deutsche Bank are particularly bearish on the inflation outlook for the UK, the bank are stating that before the Brexit vote, the Bank of England inflation projections were 1.8 per cent for end-2017. Since the vote, consensus forecasts for output growth have been slashed nearly two per cent, potentially depressing prices by about 0.5 per cent. Meanwhile, higher import prices should add nearly four per cent to CPI over three years, nearly half of that by 2017. The net effect should send inflation above three per cent. However, if sterling declines by 10 per cent as predicted, inflation’s 25-year high of 5.2 per cent may be threatened.

Also from the US, more labour data is released today as they post their Jolts job openings with expectations to remain constant at 5.79m jobs added.