Currency Note

Sterling’s support ends with Johnson’s narrow victory

By Alex Bennett June 7th, 2022

News of a no-confidence vote on Boris Johnson’s premiership boosted the pound yesterday morning. However, that has gone into reverse this morning as a potentially weakened prime minister may now limp on for over two more years.

The pound surged by almost a cent against USD and a little less against EUR on the news of a potential end to Johnson’s reign yesterday.

While this may at first seem counter-intuitive, as the currency markets tend to favour stable (and Conservative) government, it seems likely that the markets judge that (a) a new leader may rejuvenate the Conservative Party and increase the likelihood of victory at the next general election, and (b) a different leader may decrease the chance of discord with the EU over the Northern Ireland protocol and avoid a trade war.

In any case the Prime Minister won, but by potentially too small margin to see off future challenges. Hence GBP/USD is now weaker than where it started yesterday morning and GBP/EUR is not far off.

Other than that it was a quiet day for data, with the only release being a disappointing decline in new car sales year-on-year of 20.6%.

The markets will be keeping an eye out for any hints of a Johnson resignation, but as the pundits have noted, that seems unlikely.

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GBP: Pound’s boost ends decisively

Sterling strengthened by close to 1% against USD and slightly less against EUR when news of the confidence vote came in yesterday morning. However, that strength dissipated over the course of the day, until the narrow Johnson victory came in at 9pm and the decline has been steep.

Amidst all the political news yesterday, UK new car sales fell to their lowest May result since 1992. This morning we have heard that retail sales in the UK fell by 1.5% compared to last May.

Later this morning there will be a final reading for services and construction PMI, which in their ‘flash’ reading were recorded as falling severely from April to May.

Tomorrow we’ll get the Halifax House Price index which last month rose by 1.1%. This is not predicted to be repeated for May, however.

There is also the possibility of more political developments, and the risk that the currency markets see a threat from the increased likelihood of a Labour Party victory – or coalition government – at the next election.

GBP/USD past year

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EUR: Euro shrugs off pound’s brief recovery

Aside from yesterday’s brief drop against sterling – since almost recovered – the single currency has had a strong run, marginally beating most of its major rivals over the past week apart from AUD, CAD and USD.

This is largely based around last week’s high inflation figures raising the possibility that the ECB will (finally) raise interest rates.

There were no important data releases yesterday, but today we’ll hear Construction PMI across the eurozone and consumer confidence for Spain.

However, it is the interest rate decision on Thursday that really has the ability to move the markets and determine the direction of EUR in the near future.

USD: Dollar beats all rivals

The US dollar enjoyed a positive day yesterday, beating all of its major rivals and putting sterling securely back in its box this morning after the brief no-confidence-vote recovery.

Against EUR, although slightly off its record peak of last month, the dollar has stabilised.

Yesterday was quiet for data but today there will be Balance of Trade. For the big data event of the week we’ll have to wait until Friday, with both inflation and Michigan Consumer Sentiment.

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