Morning Brief – It’s raining, it’s pouring

Charles Porter
Thu 23 May 2024

It’s raining, it’s pouring

And Rishi Sunak was cawing. Stood defiantly behind the lectern placed in the middle of Downing Street, if it weren’t for the puddles accumulating on Rishi’s shoulders, you’d have never known it was lashing down with rain in central London yesterday. Only time will tell whether the rehearsed and enthusiastic declaration of a general election to take place on July 4th whilst standing in the pouring rain will prove to have been the Conservative party’s best attempt yet at pathetic fallacy. The headline today in FX was expected to be fought between the minutes of the latest Federal Reserve meeting and the deluge of UK inflation data published ahead of the European open yesterday. As the look on the Chancellor’s face yesterday should tell you, it wasn’t expected that the UK general election was to be declared yesterday. 

Let’s start with inflation because it was likely a major catalyst for the decision to declare an election yesterday. Headline inflation missed expectations month-on-month and year-on-year, showing less progress on inflation as the UK entered Q2 than previously imagined. Headline inflation read at 2.3%, above the 2.1% consensus forecast, and core inflation remained stubbornly high at 3.9% versus an expected 3.6%. Progress, but much less than economists thought. Sterling leapt higher upon the release. As we’ve written on this week, that data was critical to analysing whether or not the Bank of England would cut rates in June. Based upon this miss in the data, quite possibly not it seems. GBP demand therefore grew as investors leant towards expecting rates to stay in elevated territory for slightly longer. 

However, the Prime Minister declared victory over the cost-of-living crisis as a result of the return to near-target inflation. He refused to rule out rumours of a summer general election at PMQs in the House of Commons yesterday and Westminster election fever started to grow. A meeting of cabinet later that afternoon and shortly thereafter, the public learned that an election was to come on July 4th. With such a convincing lead held by Labour in the polls, there was very little reaction in FX spot pricing. If anything, the declaration of a sooner than expected election decreased the political risk that polling could change more significantly later in the year. A spike in implied volatility was all that was to be observed in GBP for options contracts expiring between now and shortly after the election date. Yesterday’s data and the forthcoming election will test central bank independence as both entities will be well aware that falling interest rates could sell well to an electorate. 

Discussion and Analysis by Charles Porter

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