Cable jumps to test $1.29 as Nigel hands Boris an early Christmas present

Forex

Markets have quickly priced in higher odds of a Conservative Party victory in the coming General Election after the Brexit Party today launched its own campaign.

Party leader Nigel Farage has backed away from his initial aim of fielding 600 candidates and will instead focus on Remainer strongholds; those held by Labour and the Liberal Democrats.

Farage has gone as far as to say that his party will not contest the 317 seats won by Conservative MPs during the 2017 election. He seems to have been persuaded by Boris Johnson’s commitment not to extend the transition period beyond December 2020.

Having knocked on $1.29, cable pared gains to trade around $1.2880. EURGBP dipped below 0.8560 before retracing to around 0.8570. The pound is stronger since a clear, decisive election win for the Conservatives will provide clarity on Brexit – anything else becomes messy.

GBP/USD 5min Chart, MARKETSX, 14.30 GMT, November 11th 2019

This is a huge boon for Boris Johnson. Conservatives had reason to fear the Brexit Party before, as it offered a place for Leave voters who felt betrayed by Johnson’s broken promise to get Brexit done by October 31st. The PM claimed he would rather be dead in a ditch than request an extension, but thanks to some legislative arm-twisting, he was forced to do so.

Everyone knew it would have been crazy politics for the Brexit Party to take Leave votes away from the Tories and enable a pro-Remain grouping to take seats.

Now Leavers in many constituencies have a much clearer choice; back the Tories or abandon Brexit.

Cable drops as UK economy contracts

Forex

The UK economy contracted by 0.2% in the second quarter of the year, its worst performance since 2012.

Figures from the Office for National Statistics showed the surprise contraction, which was significantly lower than the flatline economists expected. It also follows strong growth of 1.8% seen in Q1.

“PMI data had indicated we were set for a contraction, albeit not so severe,” explained Neil Wilson, Chief Markets Analyst at MARKETS.COM.

Much of the growth in the first quarter was attributed to panic buying and stockpiling before the original March Brexit deadline. Indeed, Head of GDP Rob Kent-Smith, also blamed the 2.3% drop in Manufacturing output in the Brexit delay. The initial strong start to the year included production brought forward ahead of the UK’s departure from the EU.

The services sector was the only positive contributor to GDP growth in the quarter to June 2019 – but only just at 0.1%. This marks the weakest quarterly growth in this sector since Q2 2016.

Output from the production and construction sectors also contracted at -1.4% and -1.3% respectively.

Cable dropped sharply on the news, before recovering slightly. Having fallen below 1.2090, GBPUSD was last recovering above 1.21 but remains under pressure and a good 30 pips away from its highs of the day. Having breached yesterday’s lows we may see further testing of the downside.

“Clearly the unwind of stockpiling carried out in Q1 ahead of the aborted March 31st Brexit deadline has had an impact. Also, we can point to plenty of data around the world that shows we are in the middle of a broad global slowdown,” Wilson said.

“But you do have to admit that the pervasive uncertainty around Brexit is acting as a brake on the economy.”

Rolling three-month growth was negative 0.2% in the three months to June 2019, the first time since Q4 2012. This continued a steady decline in three-month growth since the start of the year.

So, was there anything positive in the latest GDP figures?

“Well, a lot of the decline seems to be down to the fall in car making as companies brought forward usual summer shutdowns of factories. The sharp fall in manufacturing output was led by a 5.2% decline transport equipment, which the ONS says largely reflected the partial closures of various car manufacturing plants. This may be partially recovered in the second half, while we may see further stockpiling ahead of the October 31st deadline that leads to a boost to Q3 numbers,” said Wilson.

However, he added, “but on the whole the figures make for worrying reading”.

Does Boris mean bad news for cable?

Forex

The UK is less than a day away from finding out who the next Prime Minister will be. The winner of the Tory leadership contest will lead the UK in its exit from the EU later this year, and Boris – who has refused to rule out closing Parliament to secure a no-deal Brexit – is favourite to win.

Cable is unsurprisingly jumpy on the topic of Brexit, and it pushed higher last week when MPs made it harder for the future PM to force through a no-deal Brexit by suspending Parliament.

The new bill states that even if Parliament is suspended, it must sit for a few days in September and October to consider issues in Northern Ireland. It also requires ministers to make reports every fortnight on progress towards re-establishing Northern Ireland’s collapsed, devolved executive and to give lawmakers an opportunity to debate and approve those reports.

While the legislation would not prevent a Parliament being suspended, it would make it harder to sidestep lawmakers.

Already Decided?

A poll of Tory members suggested that Boris has two-thirds of the vote. More than half of those who voted Conservative in the last general election would vote for Boris, compared to just 27% for Hunt. Voting is currently taking place and closes at 5pm today, with the winner expected to be announced tomorrow.

However, Boris is the firm favourite to win and, barring something spectacular, will take over the reins as Prime Minister on Wednesday. So, while markets are likely to react to the news, it’s likely that much of the turbulence has already been factored in.

What to expect

The pound is already weaker, with cable losing about 50 pips today in morning trading.

Concerns about Brexit – and, therefore, the leadership contest – continue to drag the currency down. GBP/USD had started the session north of 1.25 but was last making new lows around 1.2460. It’s likely that if hard-brexiteer Boris is announced as the next PM, sterling will take a knock.

However, leading thinktank National Institute for Social and Economic Research (NIESR) has warned that the dampening impact of Brexit over the last three years could have dragged the UK into recession already.

Overall, the think tank sees a 30% chance Sterling will decline over the course of 2020, and that probability will be higher if Britain crashes out of the EU.

Even if a no-deal Brexit is avoided, NIESR predicts the economy will grow just 1.2% this year and 1.1% next year as uncertainty about Britain’s future trading relationship with the bloc will hold back investment and slow growth.

Cable higher on plans to thwart no deal Brexit

Forex

Members of Parliament yesterday voted in favour of legislation that will make it harder for the next prime minister to push through a no deal exit from the European Union.

The move comes as we move closer to finding out whether Boris Johnson or Jeremy Hunt has won the Tory leadership contest and will therefore replace Theresa May as Prime Minister.

MPs fear hard Brexit under Boris

As one of the key figures in the Brexit campaign, Boris Johnson has been unsurprisingly vocal on his commitment to taking the UK out of the European Union. He has said that he would prefer to leave with a deal, but is prepared to make a clean break from the EU if no new deal is forthcoming. Officials on both sides have until October 31st to negotiate new changes to Theresa May’s Withdrawal Agreement.

MPs are concerned that Boris Johnson may even attempt to suspend Parliament in order to force through a no deal Brexit in October. Lawmakers have been tenacious so far in their efforts to avoid the UK leaving the European Union without a deal, although a series of indicative votes left it clear that there is no majority in Parliament for any of the Brexit options (including a second referendum).

As the odds on a victory for Johnson have increased, cable has come under greater pressure as markets price in larger odds of a hard Brexit scenario. On Tuesday cable slipped below the levels seen during the October 2017 flash crash, although news of the victory for new legislation yesterday pushed GBP/USD up 0.5% to trend above 1.2485.

Legislation recalls Parliament, even if suspended

The bill states that even if Parliament is suspended it must sit for a few days in September and October to consider issues in Northern Ireland. On top of this, new legislation requires ministers to make reports every fortnight on the progress made towards re-establishing the collapsed executive in Northern Ireland, and states the lawmakers must have the ability to debate and approve those reports.

It effectively calls for Parliament to be present to debate unrelated issues so that MPs coincidentally happened to be sitting just as the UK is due to leave the European Union.

It does not prevent Parliament from being suspended, but it is another spanner in the works for Boris Johnson, should he become Prime Minister and attempt to force through a no deal Brexit.

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