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Pound whipsaws on political turmoil

By Jake Trask

It was a tumultuous day in UK politics yesterday as two key members of Prime Minister, Theresa May's cabinet resigned over the government's intended Brexit strategy, hammered out at Chequers on Friday. First to go was Brexit Secretary, David Davis who’s exit was announced on Sunday night. Davis’ letter of resignation highlighted that “the general direction of policy will leave us in at best a weak negotiating position, and possibly an inescapable one.” Comments from Davis after his departure were conciliatory in tone about Theresa May confirming that he would not be looking to make a leadership challenge and that she was a good PM. Replacing Davis will be Dominic Raab who has been promoted from housing minister. Next to go and the one that really rattled the pound was the departure of Foreign Secretary, Boris Johnson. Rumours started to circulate at lunchtime that he may be leaving and around 3pm it was confirmed he had quit. GBP/USD lost 150 pips by 5pm, bottoming out at 1.32 as markets weighed up the chances he would make a bid for power throwing the Tory party into turmoil. It has since recovered as it appears Theresa May has seen off a leadership challenge for now however her position is more precarious than ever (and that’s saying something). Johnsons resignation letter, stated that the “Brexit dream is dying, suffocated by needless self-doubt.” In a barbed response by May of Johnsons resignation, she said, “I am sorry - and a little surprised - to receive it after the productive discussions we had at Chequers on Friday.” Health Secretary, Jeremy Hunt has been drafted in as replacement for Johnson as Foreign Secretary.

Politics is likely to dominate news for the time being however there is some data out today from the UK with the first monthly print of GDP. This will be released each month as a gauge for the month before last, ie this July announcement is for Mays numbers. We also have UK Manufacturing Production at the same time which is expected to show 1% growth m/m. Cable sits around 1.3280.

It’s been a quiet start to the week from the States with little data or Trump sabre rattling to move financial markets. Its likely that Trump has had to take some time out to consider his nomination for the next Supreme Court Justice which was confirmed last night as being Brett Kavanaugh who is replacing Anthony Kennedy who has served for 30 years. Trump appears to be trying to exert a right-wing influence to the Supreme Court with some expecting a challenge the 1973 Roe v Wade ruling which legalised abortion in the US at some point in the future. Data-wise its another quiet day with tomorrows PPI numbers the first noteworthy release of the week.

Mario Draghi gave an upbeat testimony on the state of Eurozone economic health yesterday in Brussels stating that inflation was on a self-sustaining path and that the banks QE programme would add around 1.9% to GDP between 2016 and 2020. Despite this upbeat assessment EUR/USD failed to break through 1.18 retreating to around 1.1740 as a relatively well bid greenback appreciated across the board. Draghi is due to speak again tomorrow before Thursdays ECB meeting minutes which may cast some light on when the bank is likely to hike rates. Current market thinking is late 2019 should the minutes hint at anything sooner expect a euro rally.

Overnight saw the release of the latest National Australia Bank Monthly Business Survey with its Business Confidence reading coming out at 6 down from an upwardly revised 7 seen for May. Alan Oster, NAB Group Chief Economist commented “The survey continues to suggest relatively robust growth in the economy but also suggests that broader inflationary pressures remain weak with slow rates of both purchase price and final products price inflation. Labour cost growth remains weak, though there is some evidence of a pickup in specific industries.” This subdued inflation is consistent with market expectations that we will be waiting until 2019 for any hike in rates from the Reserve Bank of Australia. AUD/USD fell short of .75 yesterday as broad dollar strength saw off its play for the big number. GBP/AUD sits at 1.7805.

The first big event this week for CAD will be tomorrows Bank of Canada interest rate decision which is expected to see a rise from 1.25% to 1.5%. Markets will be focused on the accompanying statement from BoC chief, Stephen Poloz as to whether it will be a “dovish hike” given the ongoing trade tensions between Canada and the US. GBP/CAD trades at 1.7435.

The Kiwi has mirrored the Aussies slight fall against the greenback overnight with NZD/USD trading at .6830. The only data of note from NZ is Thursday nights Business NZ Manufacturing Index which last time posted 54.5. Expect any new rumblings from Trump re: trade to be the main drivers for the local dollar before then. GBP/NZD is at 1.9450.