Waiting for clues
Today's news headlines:
- ‘Britain set to miss 2020 environmental goals’. The majority of the UK government’s goals to reduce air and water pollution, improve biodiversity, and increase recycling by 2020 will be missed, according to analysis by the Financial Times and Greenpeace. The targets were imposed by the EU and the UN as well as the UK government itself. Environmental campaigners have urged the UK not to lower environmental standards when the UK leaves the EU, but such commitments are absent from Boris Johnson’s Brexit deal. (Financial Times)
- ‘Hong Kong hit by second day of transport chaos and clashes’. Hong Kong’s financial district has been disrupted by clashes between students and police following Monday’s chaos after a protester was shot by police. Multiple metro stations remain closed, and many lines have reduced services, forcing commuters to walk along tracks on Tuesday morning. (Financial Times)
We’re just over four weeks away from what could be a Brexit-making general election, and as such, the Pound is jittery to every political twist and turn. Earlier this month, Brexit Party leader, Nigel Farage, outraged at Boris Johnson’s Brexit agreement, pledged to field candidates in 600 constituencies unless Johnson abandoned his deal and agreed to form a new leave alliance. The Pound retreated to a low of 1.2769 as markets feared that another hung parliament and more Brexit uncertainty was inevitable. Additionally, the possibility emerged that Labour could stumble into a majority, resulting in four years of Corbyn; an idea markets haven’t taken to favourably.
Yesterday, however, Farage suddenly retreated, with the announcement that the Brexit party had decided not to field candidates in, some 317, seats won by the Conservatives in the 2017 election. In theory, this leaves the Prime Minister free to concentrate on winning marginal seats currently held by political rivals. Farage cited the need to avoid a hung parliament as the reason for his surrender, as a potential ‘Remain Alliance’ or a Labour-led coalition could result in Brexit being lost altogether. Still, Sterling’s been reluctant to overreact to the news; the immediate jump was to just below the 1.29 mark, but we’ve come off those levels and find ourselves back in the low 1.28’s. Why’s that? Well, we’re seeing added pressure on Farage to give up challenging for marginal Labour seats as well, clearing the way for an outright Tory win come December 12th. At this stage, it’s still unlikely that the Brexit Party leader will concede more ground. The only assurance he’s been given by Johnson is that the UK won’t extend the Brexit transition period beyond 2020, a claim that could still end up being an outright lie at its worst.
Bottom line: Yes, there’s some positivity to jump on, but it’s not a given that this news will dramatically affect the outcome of the election. As always, we’d rather wait for more clues from polling data before considering who may be in power come Christmas. The Pound’s likely to remain sensitive to politics in the meantime but unlikely to be susceptible to oversized moves in either direction.
In yesterday’s session, the pair climbed to the 1.29 level following Farage’s announcement that the Brexit Party would not go after Tory seats in the UK’s December election. The pair traded around 1.2860 overnight before falling again on the London open. The trade-weighted Sterling Index remains trapped in its tight range as investors await the UK’s general election in four weeks. The Dollar index closed just shy of the 50-daily moving average, which could keep the Dollar under pressure throughout today’s session.
With the Euro Index finding a floor to its recent decline, Sterling could be the main driver of the pair today as general election developments continue to emerge. Yesterday, the pair reached highs of 1.1685 following comments from Farage but quickly reversed. The pair opens London’s session with Sterling selling pressure, bringing GBP/EUR back towards the 1.16 level.
The pair traded flat yesterday, reaching one-month lows of 1.1017 before rebounding. This morning’s European economic sentiment data could cause the pair to test this level again in today’s trading. The Euro Index appears to have bottomed out for now following six consecutive days of decline. The US Dollar Index is trading just below a key resistance level—the 50-day moving average—which could keep EUR/USD afloat in the short-run.