FX round-up: Pound knocked lower by speculation new elections imminent
By Alexander Bueso
Date: Tuesday 03 Sep 2019
(Sharecast News) - The downdraft in Sterling resumed at the start of the week as MPs returned early from their summer vacations amid heightened speculation that early elections might be called for as soon as the coming week.
Close on the heels of his decision to prorogue Parliament for five weeks, which the opposition decried as anti-democratic, at the weekend, Prime Minister Boris Johnson threatened to unseat any Tory MP that voted with Labour to block a 'no deal' Brexit via the legislative path.
As if out of thin air, talk of a possible election being called emerged first thing on Monday morning and by 2000 BST, cable was trading 0.81% lower at 1.20653 and teetering on the brink of its post-referendum lows.
It was a similar story against the single currency, with the pound dropping by 0.64% to 1.0998.
"If neither a vote on legislation to delay Brexit or a vote of no confidence has happened before Parliament is suspended, the chances of a no deal Brexit would probably take a step up, resulting in gilt yields and the pound taking a further step down," said Paul Dales at Capital Economics.
Nonetheless, another City-based analyst believed the opposition would be playing into the hands of the government if it presented a bill in Parliament to block a hard Brexit.
In the background meanwhile, while on a visit to Ireland, US vicepresident, Michael Pence, said that the US administration wanted the terms of Britain's withdrawal from the European Union to ensure the stability of the island and to respect the 1998 Northern Ireland peace deal.
Closer to home, and echoing the concerns of many observers, the Financial Times was focusing on the tremendous economic cost that some of Labour's proposed policies, such as confiscating and taxing the shares of large UK companies, might have.
On the flip side, KPMG estimated that UK house prices might decline by 6.0% in 2020 in case of a no-deal Brexit and by as much as 20% under a worst case scenario.
To take note of, the latest US Commodity Futures Trading Commission data showed that traders had pared their short positions in cable for a third week running, from 92,418 contracts to 89,028, prompting Jan Lambregts to wonder aloud if as a result spot sterling might not now be "vulnerable".
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