Pound slides on soft data and growing GE speculation


  • Reports that UK PM set to call election

  • GBP already lower on the day after poor PMI data

  • DE30: Local elections in the background

  • US futures recover from gap lower


Speculation is mounting that Britons could be set to head back to the polls in a General Election before the October 31st Brexit deadline. Parliament returns tomorrow from its summer recess and the expected attempt from those opposed to a no-deal Brexit to pass legislation that would prohibit it has been met with a firm response from Boris Johnson. Sources close to the PM have reportedly stated that he is willing to call a snap election before the week is out should the obstructive bill pass and this would once more send the public to the ballot box. 


The hope is that the election that will likely be billed by the government as the “people vs parliament” will deliver a decisive outcome and finally mark the end of the beginning as far as Brexit is concerned. The pound has been in a steady drift lower throughout the day and has fallen by around 1% against the US dollar to once more trade near the $1.20 handle and languish not far from multi-decade lows. 


Generally speaking an election brings raised levels of uncertainty and is therefore negative near-term for the currency, but there’s also another effect at play here. The prospect of an election also offers not just the avoidance of no-deal but the possibility, however small it may seem at present, of a surge in support for remain and growing calls for a second referendum. When that is considered these latest events aren’t unequivocally bad for the pound and while the initial reaction has been lower, we could well see a recovery in the not too distant future.     


A widely viewed survey has raised alarm bells for the UK with the manufacturing PMI for August falling to its lowest level since July 2012. The print of 47.4 was below the 48.4 expected and marks the 3rd time in the past 4 months that this metric has disappointed and come in below consensus forecasts. Looking more closely at the report, the overall picture gets worse with rising inventories and a drop in exports - despite the recent GBP depreciation - key areas of weakness. In fact the latest decline in orders has only been exceeded once (in 2012) since the 2008/9 financial crisis. 


After an early foray higher above Friday’s highs, the German Dax has pulled back somewhat, trading little changed on the European close. Two German states - Saxony and Brandenburg - held local elections over the past weekend where we saw a noticeable increase in support for the euro-skeptic and anti-immigration AfD. As far as Saxony is concerned, Merkel's CDU managed to win, however, a gap to the AfD narrowed dramatically, as evidenced by the chart below. The same scenario concerns Brandenburg where the SPD came first, though its advantage over the AfD shrank notably as well compared to the difference seen in 2014. Leaders of the AfD were satisfied with the results of the weekend’s election as the trend in support remains optimistic for the party.


For the second week running there was a large gap lower seen on Sunday evening when US stock futures resumed trading after the weekend break. However, the gap has already been filled at the time of writing and once more it seems that buying the weekly open would’ve worked out nicely. The gap was possibly caused by a series of factors with more unrest in Hong Kong, Hurricane Dorian expected to be worse than initially thought and the application of further tariffs all negative events that happened since Friday’s close. 


The most likely negative impact came from tariffs with hopes of a last minute aversion misplaced and for all the positive rhetoric in recent weeks, the actions are speaking louder than words. The fresh US tariffs which came into effect yesterday cover $112B of Chinese imports on items such as nappies, shoes and food are likely to have a bigger impact on the consumer than previous attempts, due to the composition of the products targeted. 


After filling the gap back to 2923, S&P500 futures have drifted lower again and trade down by around 10 points at the time of writing. 


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