Boris’s boost for the pound, and what to expect from the ECB

The markets are changing gear as we lead up to the ECB meeting on Thursday. The pound is in recovery mode as Boris Johnson takes the helm as the new British Prime Minister, US stocks are falling back from recent highs after more lacklustre corporate results, German stocks are on top after some weak economic data, and financial markets are still pricing in a 25% chance of a double rate cut from the Federal Reserve next week. 

Dude, it’s time for a pound recovery 

Looking at the pound first, GBP/USD has had a torrid July. At the start of the month this pair was touching $1.27, however, a mere two weeks’ later it was down below $1.24 as investors started to price in the prospect of a no-deal Brexit under Boris Johnson. However, in typical ‘sell the rumour, buy the fact’ fashion, the pound has rallied on the back of Boris Johnson’s first speech as PM earlier this afternoon. PM Johnson struck an upbeat note about the UK’s prospects post Brexit. He talked about getting the country going again after the period of stasis since the 2016 Brexit vote, of attracting foreign investment to the UK and boosting UK business abroad. But most importantly for the pound, he talked down the prospect of a no-deal Brexit. He sounded positive about re-negotiating Theresa May’s Brexit deal, including a no-boarder scenario for Northern Ireland. He also said that he wanted to get a deal with the EU before the 31stOctober deadline to leave the EU, however the UK will prepare for a potential no-deal scenario in case the EU doesn’t want to renegotiate with him. This was a clever tactic, in full view of the public Boris Johnson hit the ball back into the EU’s court, if they don’t agree to renegotiate the UK’s Brexit deal then it will be Europe’s fault for the fallout for the UK, European and global economies. 

Could Boris Johnson be the tonic that the pound needs right now? 

Does the FX market need a dose of his infectious positivity and his belief that the UK can have a good Brexit? Current price action suggests that the FX market is giving Boris Johnson a warm-ish welcome. So far, GBP/USD has not been able to sustain gains above $1.25, however, if we can get a daily close above this level then a move back towards $1.27 is possible. With the ECB and the Fed both expected to strike dovish notes in the next 7 days, the pound could be in line for a prolonged period of recovery. It’s a tough task for Boris Johnson to change Brexit’s impact on the pound, which so far has negative for sterling, however, the FX market seems to be giving him the benefit of the doubt, for now. Of course, we have to wait to hear the EU’s response, however, with most of Europe on holiday for the next month, and the top brass in the EU being replaced over the coming months, that response may not be forthcoming, which could allow the pound some time to recover. EUR/GBP is also worth watching, as the pound makes gains across the board on Wednesday. This pair is at a monthly low, and is testing the key 0.89 level, after weak European data weighed on the single currency, combined with a Boris bounce for the pound. 

Are Boeing’s Q2 results a nadir for the beleaguered company? 

Elsewhere, the S&P 500 is mostly unchanged, however the Dow Jones is down 0.5% at the time of writing, as this industrial-heavy index weakened on the back of a weak set of results from Boeing and Caterpillar. Boeing beat estimates, however it also reported a near $3bn loss compared to this time last year as a result of the 737 Max crisis. Revenues of $15.7 bn also missed estimates and were significantly lower than the near $25bn of revenues reported a year ago. The question now is, can a line be drawn under this crisis? Time will tell if the relaunch of the 737 Max later this year, which is expected to be called 737 8200, can turn around Boeing’s prospects. For now, today’s results have triggered a near 3% decline in the share price, we need to wait to see if this will trigger a meaningful recovery in the share price. Interestingly, the technical indicators suggest that Boeing’s share price is ripe for a recovery, and a move back above $400.00 may excite the market and lead to some upward momentum. However, in the short-term Boeing may have further downside to come as a result of these results, but if the market believes that the worst is over for the company, then we could expect to see a recovery in the share price over the coming months. 

Market prepped for ECB to turn on the money taps 

The focus on Thursday will be the ECB meeting. Although no change is expected at this meeting, the market is looking for a clear signal that more stimulus will be on its way in September. The weak German manufacturing data for July has all but sealed the prospect for more bond-buying from the ECB. The question now is, when will this take place (most likely September, before Draghi steps down), how much it will be, and what form will it take. As we lead up to this meeting, the euro may continue to struggle, we also expect the Swedish Krona to struggle as the Swedish central bank tends to follow in the footsteps of the ECB. We have spoken above about the prospects for EUR/GBP above, but for EUR/USD a move back towards $1.1120 – the low from late May – is on the cards. If this pair falls through this key support level, then a move back to $1.10 is on the cards. For now, the prospect of ECB stimulus and a weaker euro is good news for the German Dax, which may outperform the UK’s FTSE 100 in the lead up to the ECB meeting.