Sterling can get its Johnson on for a spell

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By :  ,  Financial Analyst

A small window of certainty for sterling

As the curtains, finally, come down on one political episode, and sterling markets gird for the next cliff hanger, one thing at least quite certain. The pound is, paradoxically, due a short break against most currencies. And one of the clearest reversals around the corner looks to be against the euro.

The Westminster outlook has seldom had so many moving parts, with a long weekend news vacuum for the press to thoroughly masticate them. By Sunday, the Conservative Party will have hard evidence of how far to the right its ‘base’ has swung, when results of the European elections come through. All indications point to a drubbing for the Tories; and to an extent, Labour too. The most important takeaway form the perspective of the political outlook is how much the result increases the momentum of Boris Johnson’s leadership bid. Sterling has been quite agnostic to the person per se, just hyper-sensitive to the possibility that he might be the one to pull the no-deal trigger. Hence the irony of Johnson helping the euro achieve, with a well-timed speech, what appears to be a record fifteen-consecutive rising days against the pound. (Though it looks set to miss making 15-straight higher daily closes.)

After the weekend, there will actually be another ‘gap’, which is likely to be filled with further feverish speculation. Theresa May’s formal resignation is set for 10th June. With the high chance that she will be succeeded by a right-leaning Eurosceptic, that would also require a Chancellor of the Exchequer of a similar colour. In turn, that possible new chief finance minister will oversee another critical succession, that of the Governorship of the Bank of England. However he or she conducts the recruitment process, they’ll be lucky to avoid sterling volatility. So net-net, sterling will continue to have few friends in high places for many months to come.

At the same time, all economic drum beats continue to pound the same message about Eurozone growth. If, as seems possible, signs that oil demand has reached a peak are corroborated, energy prices will be removed from an already anaemic euro-inflation equation. Sterling’s challenges are considerable. But for now, the long-term underlying economic picture for Britain’s main trading partner is far worse. The euro therefore stands to lose at least some of its stellar run against the pound fairly quickly.

Chart thoughts

Top-of-the-range significations are key. The long ascent has skidded into the region between two failure highs—88.62 and 88.40. Both protect the 86.76 pivot whose import is currently being flashed by confluence with the 200-day moving average and roughly 50% of the recent advance. The real prize lies beneath at swing lows between 84.72 and 85.03.

Chart: EUR/GBP – daily

Source: Tradingview/City Index

Related tags: Euro Johnson May UK Europe Forex EUR GBP

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