Members of Britain's Conservatives Party have named Boris Johnson as the new Prime Minister, Ashraf Laidi breaks down what that means for FX markets.
Members of Britain's Conservatives Party have named Boris Johnson as the new Prime Minister by a comfortable margin of 92,153 votes to 46,656 votes for Jeremy Hunt. The British pound sterling resumed its pre-announcement gains following remarks from EU Brexit negotiator Barnier, who stated: "We are ready also to rework the agreed Declaration on a new partnership in line with EUCO guidelines.”
The pound pushed up half a pence off its session lows to 1.2480 before dropping back near 1.2440s amid broadening U.S. dollar strength. The GBP implied volatility chart may indicate a receding fear factor in sterling, which explains the lack of any sharp declines in the currency.
In other news, the International Monetary Fund downgraded its forecast for 2019 and 2020 global growth by 0.1% to 3.2% and 3.5% respectively. Q1 global trade volumes were revised down to their lowest in seven years (see chart).
Since Johnson is widely expected to reiterate his vow for Brexit by end of October, it should be asked to what extent will his readiness for a no-deal impact the union of the Party and endanger the coalition in power. The more cracks with the coalition, the more we're likely to hear about the possibility of new elections, at the expense of GBP.
On the EU side, Barnier's willingness to consider amending the Brexit Declaration will be a function of Boris Johnson's demands and compromises. The cohesiveness of the Conservatives will also be a key factor for the Europeans.
Staunch anti no-deal exit such as Cabinet members such as Chancellor Philip Hammond, are expected to quit on Wednesday before Johnson has a chance to announce his government. Hammond will lead a group of about 30 Tory Members of Parliament aimed at blocking a no-deal exit. How deep will the fissures in the party be, will be the question for the rest of summer and fall.
Meanwhile, we have nine days until the Bank of England releases its quarterly inflation report, with the latest revisions for growth, inflation and interest rates. Bank of England Governor Carney has already signaled that growth will be revised lower.
FX traders cannot avoid the strengthening U.S. dollar, but they also must be aware of the periodical bouts of FX verbal intervention (tacit and otherwise) from President Trump and/or announcements regarding the US-China trade talks.
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Ashraf Laidi recently talked about the Dollar, gold and the Chinese yuan Triangularity at TradersEXPO New York.
