Pound erases post-election gains

Summary:

• PM Johnson expected to sign bill for Dec 2020 deadline

• GBPUSD and EURGBP return to pre-election levels

• Banks and Housebuilders pare recent gains 

There’s been some selling in the pound in recent trade as the markets have seemingly woken up to the risks and ongoing uncertainty that will remain in place despite last week’s landslide election victory for the Conservatives. The GBP/USD rate has fallen back to the $1.3170 level to trade where it was before last Thursday’s exit poll which sent the pound soaring.

GBPUSD has fallen back to trade around the level it did before the pair surged higher on the exit poll which all but confirmed a large Conservative majority. Source: xStation 

Brexit transition to end in a year?

The catalyst behind these declines appears to be reports that Boris Johnson is set to write into law that the transition arrangements with the EU must end by December 2021. This is something that the PM has said previously but the move to pass a bill to legislate it was unexpected by some and has raised concerns about a no-deal Brexit once more. To be clear, even if this bill is passed it could quite simply be superseded by a 1-line bill in the future. Even though the move is more symbolic than legally binding, it does suggest that the government’s approach towards Brexit hasn’t changed.

It also seems to suggest that for now the sizable majority held by the Conservatives means that the government will use this to play hard-ball with the EU, rather than to move back to the centre and alienate the more eurosceptic wing of the party. It has taken less than a week for the pound to complete a round-trip, illustrating that political uncertainty has far from been eliminated and that two-way risks remain for sterling going forward.

UK jobless rate falls to lowest since the 1970s

On the data front there’s been some positive news from the UK with the unemployment rate falling back to a 45-year low, although a slower than expected pace of wage growth has taken the gloss off this a little. Unfortunately for those who like to follow economic indicators, these remain not too important in terms of driving the markets at present with investors fully aware that the possibility for a seismic change on the political front renders the current economic environment a potentially poor predictor of the future one.    

Best performers become biggest fallers

The reaction in the stock market has mirrored that in the FX space, with some of the best performing shares in recent sessions falling the furthest today as the foundations upon which they were built start to look not quite so solid. Lloyds Banking Group is down by more than 5% as the worst hit of the banks, but the sector as a whole has moved firmly lower today. Housebuilders near euphoric reaction has also been tempered somewhat with Taylor Wimpey and Berkeley Group Holdings both dropping by around 3.5% although they do both remain comfortably above their pre-election levels.   

LLoyds bank shares have fallen to their lowest level since last Thursday’s close this morning but still remain around 4% above that level. Source: xStation