LCG:Pound hammered on early election talks, euro consolidates below $1.10 on increasingly dovish ECB expectations

September 3, 2019

Boris Johnson has gone wild with the idea that the Brexit deadline could be delayed by three months to January 31st, if British lawmakers refuse to leave the EU without a deal. Johnson asks the freedom to walk out the EU with empty hands, with the belief that this could increase his negotiation power to obtain a better deal. But not everyone shares his opinion. Playing Johnson’s way is a risky alternative and many policymakers are willing to seek a compromise with the EU to temper the negative impacts of an inevitably painful divorce.

At this point, with a slim majority of just one in hand, Johnson cannot afford to lose support from the Conservative Party members. As a result, he is now pressuring Tories to stand next to him at this week’s vote in the House of Commons to deliver Brexit by October 31 with ‘no ifs or buts’. If not, he is threatening to expulse rebels and to throw a snap election by October 14.

As a result, on the final run-up to the critical October 31st deadline, the pound is shaken by more political uncertainties. Cable hit a fresh two-week low on rising tensions among British lawmakers. Traders are now pricing in the possibility of a no-confidence vote this week, a scenario which could get the UK’s political scene uglier than it already is. A snap election would mean that either Johnson receives a mandate to quit the EU with no deal on October 31st, or the Brexit deadline is postponed – again. Both scenarios justify a weaker pound.

Data-wise, the contraction in the UK’s construction sector is expected to have slowed in August. But the lower-than-expected manufacturing PMI released yesterday points at downside risks and a disappointment could encourage more sellers to join the crashing pound market. The key support stands at the psychological level of 1.20. Breaking this level could send the pound tumbling on stop orders and accelerate the sell-off. Decent put options are waiting to be exercised at 1.20 strike today and tomorrow.

The FTSE 100 (+1.04%) rallied on softer pound, leaving the European indices well behind on Monday. FTSE futures (+0.14%) hint at a positive start in London, as investors look to benefit from cheapening British blue chips despite the Brexit uncertainties and global trade headwinds. The FTSE 100 is preparing to clear the 7300p resistance, and head towards the 200-day moving average (7363p).

In Asia, the investor mood was spoiled by the US and Chinese officials’ inability to fix a date for the next face-to-face meeting that is supposed to take place in September. There is a rising fear that the meeting would be postponed or cancelled following the latest escalation of tensions amid the US refused to delay tariffs on $110 billion worth of Chinese goods and China answered by imposing tariffs on $75 billion worth of US imports. Investors are now worried that China could get cold feet under the heavy pressure that President Trump puts on the country relentlessly. So, the global trade disruptions will likely remain the main course on September’s menu. So far, Chinese negotiators have been accommodating to prevent the tensions from going off the roof. The ongoing trade war has already sent the economic fundamentals tumbling in the EM giant. Although the probability of a full trade agreement between the US and China remains low, China understands that avoiding a further erosion in diplomatic relations is crucial for the sake of the global economy.

Equities in Hong Kong, Shanghai and Sydney traded sideways on Tuesday. Nikkei (+0.07%) and Topix (+0.41%) ticked timidly higher on weakening Japanese yen due to a broad-based appreciation in the US dollar. The Kiwi (-0.54%) and the Aussie (-0.39%) were the biggest losers against the greenback on worries of a further Chinese slowdown.

Oil prices came under a renewed pressure after OPEC increased production in August for the first time this year. WTI crude remained capped below $55 a barrel on higher OPEC output, waning global demand due to global trade tensions, and Hurricane Dorian, expected to hit the US East Coast and cause disruption in activity. Brent crude remained offered near $59 a barrel.

The US dollar strengthened against all G10 currencies, as US 10-year yield advanced to 1.52%.

The EURUSD consolidated below the 1.10 mark as the odds that the European Central Bank (ECB) could cut the deposit facility rate by 20 basis points to -0.60% in September meeting increased to 53%. Due today, Euro-zone’s factory gate prices may have eased to 0.2% year-on-year in July from 0.7% printed a month earlier. Softer data should keep the ECB doves in charge of the market.

Elsewhere, the Reserve Bank of Australia (RBA) maintained its cash rate unchanged at 1% at today’s monetary policy meeting as expected. Australian policy makers are in a wait-and-see mode after lowering the interest rates in June and July. But the market expects two more interest rate cuts in Australia until March 2020, if the unresolved trade war between the US and China continues weighing on Chinese demand for Australian goods.

Opening calls

FTSE to open 18 points higher at 7300

DAX to open 6 points higher at 11960