GBP watched as BOE and Trump impeachment in focus

A capricious market is making it particularly tricky to trade the pound this week. One of the biggest daily rallies in sterling last Friday, on the back of Boris Johnson’s massive election victory, has been thrown away by Boris Johnson’s move to impose a hard deadline on the UK reaching a trade deal with the EU. Added to the mix is weak retail sales for the UK, and the latest news in the US, where the House of Representatives voted to impeach President Donald Trump, which could see him thrown out of office ahead of the 2020 Presidential election. 

Same old Brexit mess weighing on GBP 

Looking at the pound first, GBP/USD made an attempt at recovery early this morning and made a high of $1.3130, however this was met with stiff resistance and at the time of writing GBP/USD is testing support just below $1.31. At present, $1.3060 is key support for the pound, which is Wednesday’s low. The key drivers pushing the pound lower are 1, concerns about the hard deadline for the EU and the UK to reach a trade deal, and 2, some residual concern around Scottish independence, now that the SNP are pushing for another vote. Looking at point 1, while we had thought that Johnson would moderate his language around the trade deal now that he had a large enough majority to side-line the hardcore anti-EU ERG contingent in the Conservative Party, it appears that we spoke too soon. 

Queen’s speech could weigh on sterling 

Later today the Queen’s Speech will outline the Conservative legislative agenda for the year ahead and she will announce more than 20 new bills. Now that the Prime Minister has a majority of 80 seats in parliament, we expect that all of the legislative items announced today will pass Parliamentary votes and be put into law. One of these new bills will be to formalise the end of 2020 deadline for the EU and the UK to reach a trade deal, if this doesn’t happen then the UK could leave the EU without a trade deal. The prospect of this is likely to send another shiver down the FX market’s spine and could send GBP lower later today. The main thing to watch in GBP/USD is what this pair does around $1.3060, if this level acts as support then it would suggest that the market remains confident that Boris and co. won’t plunge the UK into chaos at the end of next year and pragmatism will prevail when it comes to a trade deal with the UK. We remain optimistic that a deal will be reached in time, after all, the UK has a trade deal with the EU already, and we expect the EU will want to strike a deal with the UK before the end of 2020 deadline. Ever the optimist, Minerva now expects a UK/EU trade deal in principal by the end of 2020, with scope for further negotiation after this deadline. Thus, today’s bill may be a symbolic offering to the leave voters who helped the Conservatives win in the North of England and who voted heavily to leave the EU. However, if GBP/USD falls through $1.3060 then it is possible that GBP/USD ends the year around $1.2820, the low from the end of November. 

Why it could be the FTSE 250’s time to shine

The main question for investors now is will uncertainty around the UK’s future trading arrangements with the EU continue to weigh on the UK economy along with the business spending in the year ahead, or will business leaders have faith in Boris and co. not to mess up and employ some pragmatism so that we leave the EU with a decent, workable trade deal at the end of next year? The FTSE 250, the broad UK index that is highly correlated with sentiment around Brexit, remains close to record highs, however it has also seen investors take profit this week. It, however, is attempting to rally this morning, suggesting that there is optimism in the market and UK stocks may continue to rally into the New Year. We believe that this index may also benefit from today’s Queen’s Speech, particularly if it includes pro-growth bills. If the FTSE 250 continues to recover and make a move back towards 21,675 – last week’s high, we believe that it would highlight a shift in confidence towards the UK economy, which would be good news for UK stocks in the months ahead. 

BOE meeting – wait until February for news 

Aside from Brexit, we don’t believe that today’s BOE meeting will impact sterling. The BOE is expected to remain on hold. We will have to wait for February’s Inflation Report to gauge what the BOE thinks of the UK’s Brexit stance. By that time, we should also know the state of the UK’s economy, which is looking pretty grim for Q4, and whether a rate cut is on the cards. For now, the BOE is having a minimal impact on the pound. 

Sweden ends era of negative interest rates 

Elsewhere, Sweden’s Riksbank hiked interest rates even though the Swedish economy is not looking too perky. The reason for the move is that interest rates have been mired in negative territory for 5 years, and the Riskbank was worried that long term negative rates were detrimental for the economy in the long term. Rates have only moved up by 0.25% to 0%, and it indicated that rates would remain at 0% for some time, so we would characterise this as a mild hike.  USD/SEK has been falling since early October and today’s news had a mild upward impact on SEK. USD/SEK could remain under moderate downward pressure in the next few weeks and we could see 9.30 in this pair.

Why Trump’s impeachment won’t impact US stocks 

Trump’s impeachment is the big news this morning. However, the market impact has been minimal so far. While this is a historical moment for the US, analysts predict a very low chance of Trump actually being kicked out of office, since his impeachment trial will take place in the Senate, where the Republicans have a decent majority. In fact, some analysts predict that this move by the House Democrats could actually invigorate the President’s support base and boost his chances to win another term in next year’s Presidential election. S&P 500 futures are suggesting a mild decline in the index later today, however, it has made fresh record highs this week and a pull back around the 3,200 mark is to be expected. We continue to believe that US stocks could push above 3,200 before year-end, especially since progress has been made in the US/China trade deal, the economy remains strong and investors are expecting corporate earnings to pick up in Q1 2020. 

Look out for next week’s 2020 outlook! We wish all of our readers a very happy Christmas!