Pound at risk as Tory Conference starts, and US payrolls beckon

The pound has a troubled relationship with the Conservative Party conference, which takes place the end of September/ start of October each year. Remember 2016 when Theresa May’s pledge that “no deal is better than a bad deal” sent GBP/USD crashing from $1.29 to approx. $1.21? Interestingly, the threat of a no-deal Brexit is still the chief concern of the Conservative Party Conference in 2019, and although the decline in sterling has not been as large, the conference, which started on Sunday, has already had a negative effect on the pound. 

The Bank of England weighs on the pound 

At the start of this trading week, GBP/USD was down approx. 10 points, however, it fell below Friday’s low of $1.2288, which is an early sign that this support level may not last. The technical signals remain negative for sterling bulls after the Bank of England’s Michael Saunders, who was recently considered a hawkish member of the MPC, switched his tone and suggested that the Bank of England may still need to lower interest rates even if the UK avoids a no-deal Brexit. A dovish central bank, combined with continued political baggage, makes the pound an unappealing choice for investors, even at these relatively cheap levels below $1.23. 

Brexit becomes un-tradable

The papers are full of the ins and outs of the Brexit saga, and we won’t bore you with our views here. However, the latest twists and turns in Parliament, including the reversal of the Prime Minister’s decision to prorogue Parliament by the Supreme Court, and the passing of the Benn Bill, which according to the text of the bill “makes further provision in connection with the period of negotiations for withdrawing from the European Union” and was given Royal Ascent on 9thSeptember, makes the future path of Brexit deeply unclear. The Prime Minister pledged to take the UK out of the EU by the October 31stdeadline at a speech to Conference today, however, the Benn Bill means that he has to do so with a deal. With a mere 31 days to go before the deadline, either the UK and EU crack on with agreeing a deal, or the Prime Minister breaks the law. 

As you can see, a PhD wouldn’t give you enough background knowledge to fathom where this will go next. Essentially, Brexit has become un-tradable. There is one rumour going around the FX market, if Boris Johnson is overthrown as Prime Minister in the coming week, and the UK manages to avoid a general election, then the expectation is that the pound could soar, as that would virtually eradicate the prospect of a no-deal exit from the EU. If this scenario comes to pass in the coming days, then we could see a reversal of the pound’s Tory Party Conference performance in 2016, with the prospect of a return to $1.30 for GBP/USD. Until then, we believe GBP is likely to remain in the doldrums, and one of the least loved currencies in the G10. 

Why the sluggish performance of US companies, is cause for concern 

Elsewhere, US stocks are set for an interesting ride this week. The largest companies, those with market cap above $100bn, are fuelling the rally in US stocks, however, there are only a limited number of these companies. In contrast, the vast bulk of US companies have market caps below $1bn, and these stocks are struggling so far in 2019. This research from Saxo Bank caught my eye, as it makes a clear break of the 3,000 level harder to achieve from a technical perspective. Of course, the day-to-day drivers of the S&P 500 will be the US economy and the US/ China trade war, however, corporate performance is also worth watching. If “smaller” US companies continue to lag then it will be harder to justify a near-record level for the stock market, as the it suggests that the US economy is not fundamentally strong.

Payrolls, Treasuries and the dollar 

For now, watch out for any other comments from the White House that could ban Chinese companies from listing in the US, as this may weigh on stocks. At the end of last week, the S&P 500 attracted decent buying interest when it dipped below 2,950. Last week’s 50-point range in the S&P 500 is deeply frustrating to trade, but a breakout could be fuelled by this week’s economic data. US ISM reports for September are released in the second half of the week, and Friday’s Non-Farm Payroll report is worth watching after August’s disappointing 130k. At this stage, the market is expecting a reading of 140k, and if this is correct then it would suggest that US employment growth is slowing, which could lead to a surge in Treasuries (fall in yields), and a weakening of the dollar as it would lead the market to question whether or not the Fed has curbed its rate-cutting cycle for this year. 

GDP and GBP 

Elsewhere, UK economic data could also impact the pound. Weak PMIs could add to expectations that the BOE may cut rates before the year is out, regardless of how we exit the EU. The final release of Q2 GDP on Monday is also worth watching, the market expects the 1.2% growth rate to be confirmed, however, any deviance from this could have a big impact on the pound. A stronger reading could fuel a recovery rally in GBP/USD, although we expect any rallies in GBP to be short lived at the moment.

The yen and the long-awaited sales tax 

It’s also worth watching the yen, as the sales tax increase finally goes into effect on October 1st. Expectations are for a smooth transition to the higher tax rate, as it has been well-signalled by the government. Early signs that the tax rate has been absorbed well by the economy, could see the yen decline slightly as the yen’s status as a safe haven means that it can fall on the back of ‘good news’.  

Overall, key economic data and the proliferation of global political risk, makes this another interesting week to trade financial markets.