After a strong weekend following Boris Johnson’s general election win last Thursday, sterling is static against the euro once again. This is following the publication of weak (flash) PMI statistics. The pound rallied last week and has pretty much retained the gains made as the markets seem optimistic about Prime Minister Boris Johnson- and specifically his ability to deliver a Brexit deal for the UK to have an orderly exit from the EU on 31st January 2020.
Pound Reacts to Stall in Output
The British pound was once again put under some pressure following the publication of disappointing PMI data. This showed that output in manufacturing has dropped to its lowest in 89 months. The weak data can be attributed to various factors such as Brexit and the risk of no deal, which hit the manufacturing industry the hardest because of many companies stockpiling and preparing for a worst-case scenario.
Domestic political uncertainty in the UK and weak economic global growth also have contributed negatively to output. We can trace this back to the 2017 general election, when Theresa May was expected to have a majority government and be able to pass her Brexit deal. However, as we all know, this was not the case, with the Conservatives having to rely on the Northern Irish DUP to pass legislation. This caused problems and further created a rift within the Conservative Party- eventually leading to May’s downfall.
The general election result has given the country a clear path towards an orderly Brexit, and economic policies which welcome investment. This should hopefully provide a much-needed boost to economic activity, and hopefully sterling will also rise.
No Deal Risks
There is still a risk of “no deal”, however this risk has reduced drastically thanks to Boris Johnson’s strong majority of 80 MPs. Wit this majority, he should have little trouble passing the Brexit deal through the UK Parliament, with rumours that legislation could be laid as early as this week.
Once the Brexit deal has been ratified by the UK Parliament, a no deal Brexit will be highly unlikely (although not completely). This will give markets short-term certainty, but there is still much to be considered, such as the long-term economic partnership between the UK and the EU beyond the transition period. In the meantime, markets should look at UK economic growth data and what the Bank of England does.
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