Wednesday 21 August 2019

Pound on the skids as ECB bolsters Germany

Boris Johnson. Photo: REUTERS/Simon Dawson
Boris Johnson. Photo: REUTERS/Simon Dawson

David Chance

The British pound is the worst-performing major currency in the world and a new report from the National Institute of Economic and Social Research has said there is a one-in-four chance the UK is already in a recession, even though Brexit has not happened yet.

With Boris Johnson all but certain to become British Prime Minister on Wednesday, financial markets are increasingly pricing in a ‘no-deal’ Brexit. That speculation  caused the pound to take another stumble on Monday to 89.98 pence to the euro.

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While British markets were roiled by Brexit, the rest of the world’s eyes were on the U.S. Federal Reserve and European Central Bank rate-setting meetings, with bets being placed on who would cut the hardest.

Expectations for the size of a Fed rate cut were pared back and that saw the dollar gain a modest 0.1pc against the euro while German 10-year bonds continued their relentless march deeper into negative yield territory.

It wasn’t all good news for all of the eurozone’s bond markets and Italy sold off, with its 5-year yield up 7bps to 0.93pc, pushing the spread to German Bunds out 9bps to 160bps

The ECB kicks off on Thursday and money markets are pricing in a more than 50pc chance of a 10 basis-point cut, while the Fed meets next week and looks set to impose a 50bps cut.

The prospects for a Fed cut and expectations that Washington and Beijing will strike a deal to end their spiralling trade wars underpinned a modest rally on Wall St that saw the Dow Jones Industrial Average add 0.09pc in morning trade and the S&P500 gain 0.21pc.

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