Sterling markets yesterday were moved by the unfolding Conservative Party leadership contest, parliamentary developments as well as economic data releases. However, as with most days, the price action within Sterling’s currency pairs was largely determined by the consequences of the United Kingdom’s future relationship with the European Union. Boris Johnson, the bookmakers odds-on favourite to become the next Prime Minister of the United Kingdom, largely ditched the bumbling and boisterous persona that we normally associate with him in favour of a more moderated tone at launch of his leadership bid.
His speech was positively Vanilla compared to his usual performances, a sign that he and his team recognise the potentially damaging impact that a reminder of his chaotic and far-flung philosophies could have upon his candidacy. Following the launch of his campaign yesterday – two days later than many of his 9 rivals – the Party will have its first say on candidates in a secret ballot today. Sterling watchers should be wary around 1pm this afternoon as the results of the Party’s voting will be announced.
Any inclination of the Party to back a candidate with more moderate Brexit policies than the no-deal orientated Boris should lift Sterling. Conversely, any move to further consolidate the position of the former Foreign Secretary would harm the Pound, as investors price in the increasing probability that the UK could leave with a no-deal on the 31st October. At least one of the leadership hopefuls will be leaving the Villa this afternoon, as the candidate with the least votes will be kicked out. They’re unlike to be alone. Any candidate receiving less than 16 votes from the 313 Conservative MPs voting in the Secretary ballot will also be packing their bags and likely relegating themselves to the back benches of Conservative politics for the duration of the new government.
With 10 hopeful candidates all preaching a similar Brexit-centric policy, the composition of the eliminated few are unlikely to move markets. However, a shock dismissal from the race would force a re-pricing of the base-case Brexit outcome and therein affect the price of Sterling.
Yesterday afternoon, the Pound had a sudden tumble. Labour MPs had proposed a motion to gauge the House’s willingness to block a Prime Minister from deliberately pursuing a no-deal Brexit. The Labour Party’s motion failed, however, leaving investors and traders questioning where the House’s median voter now stands on the hard/soft/no Brexit spectrum. From the series of indicative votes in the Commons under May, it was clear Parliament did not want a hard Brexit. If they can’t block it now and are willing to leave the power to force an exit in the hands of the Prime Minister, perhaps Parliamentary consensus has moved. Sterling sold off to the tune of 0.3% and struggled to gain any traction during the New York and Asian trading sessions that followed the announcement and at this morning’s European market open.
As we warned a couple of days ago, the tension between the United States and the European Union surrounding their currency presents a risk that negative rhetoric across the Atlantic feeds through into price action. Last night’s threat by President Trump towards Germany over Nord Stream 2 created tension in the Euro. Attacking the project that would see a gas pipeline developed between Russia and Germany, Trump brought his favourite weapon to the table: tariffs. Germany is the workhorse of European growth and any threat to its output at this stage in its economic cycle could spell disaster to a slowing Eurozone.
As if this wasn’t enough to satisfy your appetite for risk within the Euro today, Italy will have its next clash with the European Union today, this time in Luxembourg. Finance ministers are set to sit down to attempt to resolve the incumbent parties’ desire for tax cuts with the Union’s imperative for states to achieve a sustainable fiscal policy. If resolve cannot be found the threat of a 4bn Euro fine on Italy will be dragged closer presenting systemic risks to the entire Eurozone.
Discussion and Analysis by Charles Porter