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Good morning,

You win some, you Leadsom

Currency markets, particularly those pairs that have included the pound, have been a fool’s errand since the Brexit vote with yesterday’s markets particularly irritating. The news that Andrea Leadsom was to drop out of the race for the Conservative Party Leadership fuelled a short sharp turn in the value of the pound. The news that we finally have a new PM – Theresa May is due to take over on Wednesday – has also helped the pound higher, over the 1.30 mark in GBPUSD terms.

As I wrote yesterday, markets have been enthralled by politics. Politics and finance can readily work against each other as much as they can work together. Solid politics can help broken finance like in 2008/9 with bailouts, tax relief, additional government spending and regulatory changes. When politics is broken, however, finance is unable to help. Tensions on both sides of the political divide naturally prevent consensus and halt progress on any number of issues. It is under this burden that the UK finds itself and hence the slow motion crawl of news flow at the moment.

The news that Theresa May will take over as PM from David Cameron may be enough to instil a sense of political calm in the short term, however thoughts around a potential General Election and/or a triggering of Article 50 in the coming months all pose risks to any possible sense of tranquillity.

If you think the Bank of England is likely to cut interest rates and use rather dovish language around its policy response to Brexit this Thursday then you have to believe that sterling is overbought at these levels.

Japan still waiting on impetus

The election is out of the way and the JPY managed to ‘do a sterling’ by posting a loss against all of its G10 counterparts yesterday with further hints on the amount, make-up and targets of any stimulus into the Japanese economy expected at some point in the next 24hrs. The Nikkei newspaper has hinted at a sum of around Y10trn – about $100bn – but previous efforts have been disappointing and flows away from risky assets will maintain a level of demand for the yen.

The Day Ahead

Mistakenly we told you that Governor Mark Carney’s testimony to the Treasury Select Committee on Financial Stability was yesterday; it is in fact today with the Governor likely to reignite his ding-song with arch-Brexiteer Jacob Rees-Mogg.

Elsewhere, the Bank of Italy will publish its monthly report on ‘Money and Banks’ – a key focus given the stresses that the local banking sector seems to be under.

These are both due at 10am

Have a great day.

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