UK gets a new PM, GBP slumps & € looks weak

GBP: Has weakened substantially in the last 2 weeks as the chances of the next Prime minister being Boris Johnson rose, and today that became a reality. His pledge to leave the EU in October, with or without a deal, has spooked markets, who dislike the increased uncertainty that a ‘no-deal’ brings.

Goldman Sachs has upped the chances of a no-deal Brexit from 15% to 20% as of midday today.

Today we sit at or near recent lows versus most major currencies, and clients are starting to look at medium term exposures, and think strategically about locking in rates or pre-purchasing.

EUR: The ECB meets this Thursday, which will be the most exciting part of the week(!) At the moment, we are looking at a 40% chance of a 0.10% cut his week, and perhaps another in Sep / Dec. This will heave yet more pressure onto a beleaguered currency. Thursday afternoon’s press conference from President Draghi will be closely watched for the extent of his dovishness.

USD: The Federal Reserve is expected to cut rates by 0.25% next week, but the USD has had a relatively strong couple of days, boosted by a flight to safety due to tensions in the Gulf. If the US does aggressively cut rates, USD may suffer, but the Gulf tensions will dictate short-term moves.

Medium term moves will also be affected by last night’s bi-partisan agreement that allows the debt limit to be suspended (allowing the Central Bank to issue bonds, increase debt and liquidity) and spending caps will be reduced (monetary policy being pulled-back to a neutral level).

China: Seen as a bell-weather for the global economy, many commentators suggest that the domestic economy needs supporting through lower interest rates. This, accompanied by liquidity injections may help to offset the economic squeeze created by the trade and technology ‘wars’. Any cut will depend upon growth in the 2nd half of 2019, but worth keeping an eye on this huge trading partner to the world’s largest economies.

AUD: A surprise win for the coalition has left a few unanswered questions surrounding tax legislation, but saw the Personal Income Tax Plan come into effect, and housing markets seem to have stabilised. Markets expect another rate cut this year and continued vigilance, especially in the light of a 4% fall in a recent consumer sentiment figure.

Lots to digest, but the Gulf tensions don’t look like going anywhere soon, and the chances of escalation seem very high – this is the key short-term driver of USD.