Pound hit as Johnson’s new Cabinet ramp up hardline Brexit rhetoric

The Pound has pushed lower at the start of this week as Boris Johnson’s new cabinet ministers have ramped up their hardline Brexit rhetoric. This has increased investors’ concerns that the UK are heading for a disorderly exit from the EU without any transition period.

Over the weekend, Michael Gove, who’s responsible for no-deal planning, said that the government are now “working on the assumption” of a no-deal Brexit and that it “is now a very real prospect”. Whilst they would prefer to reach a deal with the EU, he said that they wouldn’t accept small tweaks to Theresa May’s withdrawal agreement, which was rejected three times by parliament. Dominic Raab (the new foreign secretary) has said this morning that “the undemocratic backstop must go” and he re-iterated that they are turbo-charging no-deal preparations. Accordingly, Sajid Javid (the new chancellor) is expected to announce extra funding of more than £1 billion for no-deal planning.

Since Boris took power last week, the EU have continued to remain firm and stated that the withdrawal agreement is not up for renegotiation and that removing the backstop is not possible. The backstop is their way of protecting the Single Market which is one of their key objectives. Without any more concrete solutions on the Irish border issue, then it is hard to see them removing this from the deal. That said, Johnson’s team will be playing hardball to try and get some further concessions around this. Clearly, the UK and EU are (re-)drawing their battle lines, however, the same fundamental issues remain.

Johnson seems adamant to deliver on the 31st October deadline regardless of the negotiations. Obviously, this presents a significant risk to pound and is why traders have continued to sell Sterling off. UK lawmakers, however, will continue to try and find ways to prevent him forcing a no deal Brexit through. Although, even if Parliament can prevent a no deal Brexit, it then opens us up to a general election and therefore more prolonged political uncertainty.

The latest odds of a no-deal Brexit have been moving higher with some banks forecasting odds as high at 50%. Forecasts vary a lot between analysts with some feeling that a general election is more likely than a no deal Brexit on the 31st Oct. As a result, the Pound has hit the weakest levels against the USD since March 2017, having lost over 1% this weekend. The GBP/EUR has slipped nearly a cent lower and moved to an 11-day low.  

It’s hard to see many positives for the Pound at the moment with all of this no-deal Brexit chatter, the BoE moving to a more dovish stance, and the UK economy on the brink of a technical recession. However, it might find some reprieve on there being a short squeeze on Sterling sellers, as it is an extremely overcrowded trading position. Any bounce on this though could be short-lived until we see any major change in Brexit.

Boris wins Tory leadership election

After winning roughly two thirds of the Tory memberships’ vote, Boris Johnson has just been announced as the new Tory leader and will officially become prime minister tomorrow.

This was widely expected and the market will now be looking at how many more ministerial resignations will follow this result and, more importantly, who Boris will choose to make up his new cabinet. Investors will also be analysing how seriously he is prepared to pursue a no-deal Brexit after his aggressive tone in the leadership campaign.  

He will certainly have a tough job on his hands as he tries to bring his party and the country together. The numbers in parliament remain the same, with the Tories only having a slim majority from the support of the DUP, and his own party look set to block his no-deal Brexit plan.  

The Pound has remained fairly steady so far, as the result had been largely priced-in over the past few weeks. Although we might expect to see a bit of profit-taking on the Pound’s previous fall and therefore a bit of a bounce. Sterling gains should remain relatively capped, however, as the uncertainty and risk of a no-deal still remain. Furthermore, the Bank of England continue to be more pessimistic about the economic outlook which should also keep the Pound subdued. Until we see any positive Brexit news/developments (e.g. some sort of resolution over the Irish border), then any significant gains are unlikely.

We will have to wait and see how the new negotiations with the EU work out. It should certainly be an interesting few weeks.


Pound gains on indications EU open to revisiting alternative Irish border ideas

The Pound has recovered some ground this morning on signs that the EU might be open to further talks around the contentious Irish border issue.

Mr Barnier, the chief EU Brexit negotiator, said he was open to look at alternative arrangements for the border. Previously, the EU have categorically ruled out revisiting the withdrawal agreement, of which the Irish backstop is a key part, so his comments suggest a slight change of tone. That said, he stated that there is no “easy solution” to the issue and that it will take a long time to find possible alternatives.

Additionally, the Irish prime minister (Varadkar) has also said this morning that Ireland are open to finding genuine solutions to avoid a hard border and offered a more positive tone. As it stands, the most likely plan is to find technological solutions to prevent a hard border and allow goods and people to flow (relatively) freely between the two countries.

In other news, UK retail sales beat estimates this morning with a strong showing from non-food stores and an increase in the sale of second-hand goods. This has further supported the Pound this morning but ultimately does little to change the overall bigger picture. We would need a consistent run of positive economic data releases to change the BoE and markets’ outlooks (or obviously some extremely positive Brexit news).

As a result, the Pound has reclaimed nearly a cent against both the USD and Euro from yesterday’s fresh lows.  Traders’ eyes will now move onto UK Parliament to see if the latest attempt to block a no-deal Brexit will gain some legs.

Pound struggles amid Brexit and growth fears. USD strong following jobs report

Sterling continues to struggle as uncertainty over Brexit continues to take its toll and concerns over the British economy rise.

Both of the two Tory leadership candidates have indicated that they would be prepared to leave the EU without a deal if necessary. Boris Johnson, the clear favourite, has taken an even firmer stance and promised to leave no matter what by the 31st October. Consequently, the market have been pricing in higher odds of a disruptive exit from the EU which continues to put pressure on the Pound.

Further clouds over Sterling have been accumulating as recent economic data releases have been flagging. Bleak retail sales figures out this morning have shown a large drop in spending as Brexit concerns put consumers off non-essential purchases.

After remaining fairly resilient since the Brexit vote, the UK economy is showing signs of a larger slowdown. The latest Bloomberg forecasts of economists predicts that the economy will shrink by 0.1% in the second quarter which would be the first contraction since 2012!

Most of this can be attributed to Brexit, but there are also other major global events impacting on our growth (including the US-China trade war and the slowdown in Eurozone). The weaker UK data has increased speculation that the Bank of England might join other major central bank in easing monetary policy which is negative for Sterling.

Over the past couple of weeks the USD had started to show signs of being on the back foot as traders predicted an interest rate cut from the Fed this month. Following strong US job figures on Friday, however, the market are now becoming more sceptical over this and have reduced the odds of a cut this month (still a high chance of 0.25% cut but they’ve ruled out a 0.5% cut). This has caused traders to reallocate funds from elsewhere back into the Greenback.

As a result – other than a brief blip in January – the GBP/USD has moved to the lowest levels since April 2017. The GBP/EUR continues to trade around the lowest levels of the year.

Overall, as things stand, there is little reason to buy the Pound. To make any major gains we will need to see some positive Brexit developments and it’s unlikely anything will progress on this side until the new PM comes in towards the end of July. Therefore, in the short-term, any boosts in Sterling crosses are likely to come from weakness in other currencies and are generally expected to be short-lived.