Pound touches fresh two year lows on UK election talk

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9 August 2019


Sterling sank to a fresh two-year low against the euro on Thursday after comments from Britain’s Prime Minister Boris Johnson caused investors to fret regarding the possibility of a new UK government post-Brexit.

report suggested that Johnson was preparing a general election in the days after 31st October, the delayed date at which the UK is scheduled to leave the European Union. The holding of an election would be contingent on the PM losing a no confidence vote, something that Labour MPs appear patiently waiting for the opportune moment to call for. We have recently contested that the holding of an election may be the only way that the new Prime Minister could force a Brexit withdrawal agreement through parliament. However, with time running out, it looks likely that an election will have to wait until after the UK has officially left the bloc, deal or no deal.

Johnson has, of course, stated that the UK will leave the EU come what may at the end of October. Each day that passes without an agreement therefore brings the UK closer to a ‘no deal’, with bookers now placing around a 45% implied probability on the outcome. Sterling has been hit hard by the uncertainty and is now currently trading around 4% lower in the past five weeks alone.

Next up for the Pound will be this morning’s preliminary first quarter growth numbers, expected to confirm the Bank of England’s suspicion that the UK economy failed to grow at all in the three months to June. Any signs of contraction here could hit Sterling hard today.

German fiscal U-turn sparks brief euro rally

The traditionally quiet August trading period was briefly interrupted by a report out of Germany yesterday. Speculation that the German government could be ready to ditch its goal of balancing its budget in favour of issuing new debt provided brief support for the common currency on Thursday.

Reuters reported that an anonymous senior government source claimed Germany was ready to make a fiscal U-turn in order to help finance public spending in its costly climate protection scheme. The support the news provided to the euro was only fleeting, however, possibly due to the unconfirmed nature of the report.

There is little in terms of macroeconomic news out of either the Eurozone or US today, with PPI figures out across the Atlantic the only real data of note. Investors will instead tentatively have one eye on next Tuesday’s US inflation data, which could be key as to expectations for additional Federal Reserve interest rate easing. With the Fed now heavily expected to cut rates again in September, the real question is not whether additional cuts are coming, but how many.