Johnson odds-on favourite to prevail

The pound faltered in its advance against a weaker dollar yesterday as the race to become the UK’s new Prime Minister has entered its final leg. Although one of the final two, Jeremy Hunt, voted Remain at the Brexit referendum, he has said that (were he to win the ballot of Party members) “if a deal is either impossible to find or isn’t close to completion by October 31st, then the UK will leave the EU with no deal.”

When added to Hunt’s opponent Boris Johnson’s pledge that the UK will definitely leave by October 31st, the outlook has at least become a little clearer. There have been claims that neither no deal nor the current Withdrawal Agreement will be accepted by Parliament, but since Johnson’s policy is well known and he received votes from more than 50% of Government MPs in the Parliamentary contest, those claims are fading.

The contest now goes to the members to have their say with around 160k people getting a vote on who will be the new Prime Minister.

At yesterday’s Monetary Policy Committee, the Bank of England cut its growth forecast for this quarter from 0.2% to zero while leaving interest rates unchanged. While Governor Mark Carney wasn’t as dovish as some of his colleagues from other Central Banks have been recently, the Bank’s growth outlook certainly puts fears of a rate hike to bed.

Weak retail sales data for May was blamed on the poor weather that was seen during the month although following previous reports of consumer activity, this data is another sign that the public is beginning to view a no-deal Brexit with concern

Yesterday, the pound rallied to a high of 1.2727, closing at 1.2702 versus a weakening dollar. Against the single currency, it fell to a low of 1.1206, closing at 1.1249.

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Fed rate cut “hint” drives the dollar to a three-month low

The dollar index had its lowest close since March 26th yesterday following the reinforcing of the belief that rates will be cut imminently.

Federal Reserve Chairman Jerome Powell changed the wording of his post-FOMC briefing sufficiently to encourage market opinion on a rate cut while leaving himself enough “wiggle room” to defer any cut further into the future.

The futures market is predicting a 100% certainty of a cut of 25 basis points (bp) next month while there is a 37% chance of 50 bp. It would take a huge confirmation of a slowdown for the Fed to cut by anything more than 25 bp and that seems highly unlikely right now.

There are several caveats to any hike taking place. If there is any sign of a thaw in U.S./China relations and a deal on trade looks possible at next week’s G20 meeting, the FOMC would probably defer until September at the earliest to study the effect on the markets. If Q2 GDP is not as bad as market expectations, then any deferral could be even longer.

While Powell has sated the market’s appetite for guidance, he has managed to retain the data-dependency that has been the Fed’s policy so far this year. He is under no illusion of the views of President Trump, who is demanding a rate cut.

Meanwhile, the dollar remains under pressure, but the fall seems to be running out of steam as the economic data emanating from the eurozone (see below) continues to show no sign of any real improvement.

The dollar index fell to a low of 96.56, closing at 96.64. It has continued to fall overnight, reaching a low of 96.50 as tensions with Iran grow.

Today’s data to halt euro advance?

The Euro has temporarily lost its mantle as the weakest currency in the G7 as the dollar has fallen following this week’s FOMC meeting. However, it is likely to regain its title soon enough as traders look at what the ECB can do to stimulate activity in the region and come up “empty-handed”.

One of the trademarks of recent ECB meetings has been their propensity for “kicking the can down the road” by emphasizing the need for further study of the data.

This is now being seen as a delaying tactic due to the lack of options to materially change the current slowdown. Such an attitude contrasts with the Fed who have basically said: “You see the same data as us, you make your mind up”. The ECB seems to believe that it has some way of interpreting poor and weakening data as “not as bad as it could be, and some improvement is coming”.

The market is not being fooled by the recent rally brought about by a weaker dollar and is simply awaiting a better level to sell the Euro.

Today’s release of manufacturing PMIs by France and Germany as well as the same data for the entire region has little chance of surprising to the upside given what has gone before.

Germany is likely to show a marginal improvement in manufacturing from May, rising from 44.3 to 44.5 showing that German production is still a long way from returning to expansion.

The Eurozone will also show a continuation of contraction in manufacturing despite possibly showing a small improvement from last month’s 47.7

Yesterday, the Euro rose against the weaker dollar reaching a high of 1.1318, closing at 1.1295.