Words Have Consequences
Words indeed have consequences, and this week has been full of lessons on exactly why this adage rings so true. And as usual, any lessons that the currency markets teach us are always swift. Always brutal - and this week, the brutality has manifested itself in two ways.
First off, Monday morning. Sterling fell 2 cents in the intensification of language re-enforcing the UK government's willingness to embrace a hard Brexit. This was on the back of Prime Minister Johnson's comments on Friday; and the interviews given by Foreign Secretary Raab and Cabinet Member Gove at the weekend. And sterling fell to a 30-month low against a basket of currencies.
This morning, we woke up to news of an electoral loss for the Conservative Party at a by-election in the constituency of Brecon and Radnorshire. The winning party was the Liberal Democrats - a clear and unequivocal supporter of remaining in the EU. This is a personal loss for the Prime Minister - as it is the fastest loss of a new Prime Minister since World War 2. Furthermore, it comes against the backdrop of talk (supported by an opinion poll) showing a rise in support for his party since he came to power. So this election result may suggest that, that his honeymoon may be short-lived.
Having said that, the Brexit took 10% of the vote in that by-election. And for this reason, our analysts believe that the Prime Minister and members of his cabinet will not dial down on their rhetoric advocating for a no-deal Brexit. Since the Parliamentary arithmetic does not support this outcome, the need for electoral survival implies therefore, according to our analysts, that the next general election could be closer than most people think.
This week, monetary policy was once again prominent. This is in the context of the crucial support that dovish sounding central banks have influenced investor sentiment since the year began. The MPC at Bank of England, policy is on ice - hold awaiting the Brexit certainty (when the politicians eventually provide it) to provide direction.
So focus was on the US Fed policy meeting and, as expected, the US Federal Reserve cut rates by 25 basis points to 2.25%.
Global trade tensions have weighed heavily on the Eurozone economy this year. For example, the German output index is expected (next week's figures) to show a decline of 0.5%, to its lowest level for over two years. The rate of decline is expected to have been worse in France, with a 1.8% drop expected.
In the weeks and months ahead, at least until the Brexit deadline, we expect the hard Brexit rhetoric to remain the theme from the UK Government. Today's electoral result which saw the Brexit Party take a 10.5% share of the vote - mostly from the Tories will likely be the reason for this. So, our analysts don't expect a significant recovery for sterling unless there are major developments in Parliament.
See you next week.
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