Politics is once again driving the direction of the pound. The immediate FX reaction to the news that the Foreign Secretary had resigned was a sharp drop in sterling as the market digested the second cabinet resignation in less than 24 hours. The immediate concern was for Theresa May’s premiership, could she withstand the loss of two more cabinet colleagues? It appears that she can, and now that the dust has settled, the FX market is willing to give May the benefit of the doubt. The pound is up some 50 pips since the open. Could Boris’s departure actually give the pound a boost?
We believe that a Johnson-less UK cabinet could be pound positive for a couple of reasons. Firstly, we have to assume that without Boris Johnson continually baying for Theresa May’s blood and championing a hard Brexit, the process of government could actually be much smoother from now on. The pound has been incredibly sensitive to political turmoil since the EU referendum in 2016, thus improved government relations could boost the UK currency. Also, if Theresa May can hold on as leader and fight off attempts from Tory Brexiteers to unseat her then the prospect of a softer Brexit becomes more likely, which could also feed a pound recovery. The market is attempting to break through $1.33 resistance in GBP/USD at the time of writing, a break above this level would open the way to the $1.3355-65 highs from Monday, which is the highest level since mid-June.
Summer lovin’ for the pound?
We believe that the conditions to sustain a summer fling for the pound are starting to come together: less political turmoil, the prospect of a softer Brexit, an uptick in the economic data and a hawkish Bank of England who still look set to hike rates next month. Dare I say it, sporting prowess could also play a part as England’s progress to the World Cup semi-finals, and potentially beyond, may have a positive economic impact that could also boost the pound.
Of course, the big caveat is that the pound is still vulnerable to news flow, and if the new cabinet ends up being less harmonious than we expect, or if the EU push back on the PM’s softer proposals for Brexit, then we could see the pound topple once more. However, for now pound bulls have Mr Johnson to thank.
Euro: the real loser from Johnson’s resignation
Elsewhere, EUR/GBP is struggling this morning and has eradicated most of yesterday’s gains. This comes on the back of the improved UK political outlook and some bad news from the French economy, manufacturing declined more than expected for May. French manufacturing struggled in the first half of this year, and the fact that it has not picked up makes a rebound in the second half of the year harder to achieve. This adds to the growing body of evidence that the UK’s economy is starting to outshine its European neighbour, and we could see a sustained retreat in EUR/GBP in the coming days.
EUR/USD has also fallen this morning, suggesting that the short-term move is a broad move lower for the euro. $1.1730 has acted as decent short term support, a break below here would disrupt the uptrend that has developed since the end of June, and could ultimately see a reversal back to the $1.1680-90 the 38.2% Fibonacci retracement of the June 28th – July 6th uptrend.
Lacklustre stocks as China tariffs fail to trigger sell off
European indices are mostly treading water today. The FTSE 100 has fallen below the 7,700 level, and looks vulnerable to further declines. The Eurostoxx 50 is looking slightly better than the FTSE 100, however, even the mighty Dow Jones 30 is backing away from last week’s highs. Although last week’s trade tariffs imposed on China by the US hasn’t triggered a major stock market sell off as some had feared, jitters are starting to creep in and more analysts are supportive of defensive strategies as we move into the peak of the summer holiday season. Stocks could struggle to break higher in the near term, even though we don’t see any immediate dangers that could trigger a major sell off.
Ahead today, all eyes remain on the pound. Every hour that May holds on to power strengthens her position. If she can make it to the end of the week without further upset then we could see a more harmonious UK government start to reflect well on the pound.
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