Pound rises after Johnson’s shock Supreme Court defeat

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25 September 2019


As we thought it might, the pound rallied sharply against its major peers yesterday morning after the Supreme Court surprised the market by ruling that Boris Johnson had acted illegally by proroguing parliament just weeks before the UK is scheduled to leave the European Union.

ccording to the Supreme Court president, ‘the decision to advise Her Majesty to prorogue Parliament was unlawful because it had the effect of frustrating or preventing the ability of Parliament to carry out its constitutional functions without reasonable justification’. Parliament will now resume following its short break later today according to Commons speaker John Bercow.

In theory, the ruling should provide lawmakers with more time to put in place measures that prevent a ‘no deal’. Investors were clearly of that opinion on Tuesday, sending sterling around half a percent higher during the course of London trading. The lack of a more meaningful move in the UK currency can be attributed to the complete lack of clarity regarding the next steps for Brexit. A continuation of the 1.24-1.25 trading range therefore looks like a good bet for now, until we get more concrete news. Our base case remains for a delayed exit, followed shortly after by a general election.

US consumer confidence falters

The US dollar was broadly weaker against its peers yesterday following the release of a disappointing consumer confidence index that raised concerns over the health of the world’s largest economy.

The index fell to its lowest level in nine months in September, coming in it a well below forecast 125.1 from a downwardly revised 134.2 a month previous. This marks a rather sharp undershooting of the 133.5 that economists had pencilled in. Another drop in US yields, which fell for the seventh straight session on Tuesday, also far from helped the greenback’s cause. There has also been growing talk of a Donald Trump impeachment in the past few weeks with House Speaker Pelosi reportedly set to start a formal impeachment inquiry. While this seems fairly unlikely to reach fruition, the mere mention of a possible impeachment has got investors jittery.

Tuesday’s rally in EUR/USD was helped on its way by some slightly better-than-expected economic news out of the Eurozone. The German business climate and current assessment indices both beat consensus in September. While a tentatively encouraging sign, recent economic news out of Germany strongly suggests that another contraction is on the cards in the third quarter that would send the country into a technical recession.

The European Central Bank will be watching data in Germany closely for any signs of a more prolonged deterioration that would warrant additional stimulus. While we think that the possibility of this involving another interest rate cut is pretty low, an increase in the monthly asset purchases under its QE programme cannot be ruled out.