The outcome of the Tory leadership contest has almost reached its conclusion and by this
time next week the new Prime Minister will be in office with new cabinet also likely in place.
Relatively soon after that the truth will soon be known as to whether or not any of this will
actually make any difference to the ultimate conclusion. Naturally, the major risk is that it
will not, and the UK will once again fumble its way inconclusively, towards another Brexit
Meanwhile, the GBPUSD has managed to recover from a fresh one-year low of 1.2382
posted earlier this week, to back above 1.2525 this morning. The price did lift to as high as
1.2558 last night, but it has backed off a little as markets reopen this morning. The most
likely reason for the rebound looks linked to profit taking on short positons ahead of the
Tory leadership result. Outside of that, and a slight relapse for the dollar yesterday, I see
little reason yet to get particularly excited about the upside prospects for the pound.
Elsewhere equity markets got a lift from comments by the Fed’s John Williams yesterday
who made some very dovish remarks regarding the need for an immediate 50bp rate cut.
His comments were later downplayed by the New York Fed, but that hasn’t dented the
rebound and also helped Asian markets move higher today, led by around a 2% gain for the
What William’s comments have achieved is a change in odds for the Fed to lower rates at
the end of the month. The consensus now is that the Fed will lower rates by 25bp. The
result of that consensus shift has most readily showed up in gold with the price rising to
above $1450 yesterday evening- a fresh 6year high. Clearly gold doesn’t need to many
excuses still and yesterday’s comments from Williams provided just the right catalyst for
further gains. However, and irrespective of that, I stand by what I wrote at the start of the
week where I argued the case for the Fed to remain on hold on July 31.
Moreover, the surge in the gold price in recent weeks has it roots in a combination of
drivers and not just the prospect of the Fed lowering rates. The stronger JPY and
continuation of the bond market rally are very much at the heart of this move, but clearly
the risk dynamics are somewhat distorted because with US equity markets at, or near
record highs, no argument can be made for risk aversion driving the metal higher.
I suppose the risk for gold is that the Fed doesn’t lower rates and clearly the higher the
metal goes the greater that risk will be. Having said that, the risk aversion that’s been
absent might then show up in the equity space and help offset any interest rate
disappointment. However, beyond any immediate drivers, the longer term risk for gold
surely comes from a significant fallout in global bond markets and as I have noted in
previous articles, that risk is surely rising.
Finally, turning back to the pound this morning, the rebound to above 1.25 may have some
further upside, perhaps beyond 1.26, but anything near 1.27-1.28 looks likely to run into
sellers yet again. As for the GBPEUR, the rebound from around 1.1050, close to 1.1150
overnight and this morning looks like its stalling again ahead of 1.1200-50. As with the GBPUSD, it still looks like there’s an orderly queue looking to lean into any rally and that’s
certainly a tactic that I have, and will continue to employ, until I have reason to change my
long term outlook for the currency.
Important Economic Releases Due Later Today
19/07- 3.00pm US University of Michigan July Consumer Sentiment Index