In what was a fairly lacklustre session yesterday European markets finished the day modestly higher, with little in the way of significant drivers ahead of this week’s European Central Bank rate meeting, where it is expected ECB officials will deliver at the very least a dovish update, in order to mitigate a trifecta of risks from Brexit, US tariffs and a China slowdown.

US markets also finished the day modestly higher with tech and oil stocks helping drive the rebound, in what is set to be a big week for the tech sector, while the tensions in the Gulf helped a decent bounce in oil prices, after last week’s big losses.

Asia markets have followed on from the positive leads from Europe and the US, also pushing higher this morning and with a Bank of Japan meeting also due next week it is becoming apparent that investors are pricing in the prospect of a fair bit of easing as well as dovish rhetoric over the course of the next week or so.

After a month-long contest, we’ll find out later this morning who has come out as winner from the Conservative party leadership contest and ergo become the new prime minister of the UK.

If, as seems likely the winner is Boris Johnson, we’ve already had a taste of what to expect with the resignation of Sir Alan Duncan as a foreign office minister yesterday, with further resignations expected in the form of chancellor of the exchequer Philip Hammond, as well as justice secretary David Gauke, with both ministers making it abundantly clear that they weren’t prepared to sign up to Boris Johnson’s Brexit policy.

In any event both of these ministers would have been replaced had they stayed so their pledges to step down are merely pre-empting the inevitable, and likely to be perceived as such. The reaction of the pound on the currency markets yesterday merely served to underscore that.

When the result is eventually confirmed after 11am this morning Theresa May’s successor will still face the same intractable parliamentary arithmetic that scuppered her attempts to push the Brexit deal through the House of Commons, the only difference being that Boris Johnson, if he wins, will have to marshal his defences against MPs in his party who want to prevent no deal at any cost.

If anything, the new prime minister's task will be even more difficult given recent defections and recent by election losses, that has seen the Conservative majority slip to two, which means the DUP votes will be more important than ever in the context of getting modifications to the contentious Irish backstop.

What this means for sterling is anyone’s guess, but away from the political noise the prospect of a no deal Brexit is no higher or lower than it was a week ago, or a month ago. The only thing that has changed is that in terms of time it’s closer.

The big question now that we’re coming to the end of what has been a long few weeks will be the sort of government the new prime minister plans to put together, with the focus on not only delivering Brexit, but also focusing on areas of policy that have been crowded out because of Brexit. He will also have to help craft the government's continued reaction to the ongoing crisis in the Persian Gulf, with respect to the British tanker seized by the Iranians, and, if the winner is Boris Johnson, hope that his response is slightly more considered than when he was foreign secretary.

EUR/USD – continues to look soft having failed to push through the 1.1400 level last month. Currently finding some support near the 1.1180 level. A much larger support area sits at the May lows at 1.1110.

GBP/USD – hit a two-year low last week at 1.2380 but has been able to rebound quite nicely. Needs to take out 1.2580 to open a return to the 1.2780 area which has capped gains for the last two months.  A move below 1.2380 opens prospect of a move to 1.2100.

EUR/GBP – hasn’t yet been able to push beyond the highs we saw in January at 0.9117, slipping back from the 0.9050 area. Still in an uptrend and needs to fall below the 0.8950 area to diminish the upside risk and argue for a move back to the 0.8870 area.

USD/JPY – the rebound from the 106.75 area found itself capped by the 50-day MA earlier this month. For the rally to gain momentum we need to push back through the 108.80 area to retarget a move to the 109.20/30 area. Bias remains to the downside and the 106.00 area, while below the 109.20 area.

 

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