The pound retreats, Boris stands firm

The pound continues to decline against the US dollar and the euro as the currency market continues to price in what they believe is the increased chance of a “no-deal” Brexit. Both bodies either side of the channel are now playing chicken with the other. Boris states he will not engage with Europe unless they agree to withdraw the backstop agreement. Europe has said they are prepared not to negotiate on a deal that has failed three times in parliament.

Political commentators now expect this game to go the wire of the 31st. The pound is once again close to the level it reached post the Brexit referendum, as Boris is attempting a charm offensive around the country. Possibly seeing this as his Churchillian moment, while all around weaken in the face of pressure from Europe he is prepared to stand firm and fight his corner. Again, using the Churchill analogy, perhaps hoping the US may come to the rescue at the last moment. When will be his darkest hour?

The other story of the day is the Federal Reserve’s interest rate announcement later Wednesday. Below is a chart taken from the Wall Street Journals Daily Shot. This chart summarises the dilemma many investors in equity markets face and the impact the Feds change of stance has had on asset prices.

The yellow line is the upward movement in the US equity market, the downward line the economic surprise index. Clearly demonstrating the divergence between economic data and stock markets. We also highlighted the other day the earnings expectations may be being matched, but these expectations had been lowered already.

Therefore, the Fed’s rate announcement and possibly, more importantly, its policy statement will be of such importance to investors later today. There has been something of a recent uptick in the economic index. The hope and expectation is the additional stimulus will further stimulate the economy.

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Posted on July 30, 2019 .