FX Update: Triple whammy dents global sentiment

A triple whammy of news developments yesterday set the market on edge. First is the gathering momentum in favour of impeachment of US President Trump by House Democrats, who probably have a sufficiently large majority in favour of impeachment if a hearing goes forward. The problem for the Democratic side is that a removal of a sitting US President requires a two-thirds majority in the Senate, which is not going to happen. Still, the lack of Republican disruption of investigation into the Ukraine affair points to the severity of the charge against Trump on this particular issue and testimony from the whistle-blower in the case could prove a watershed event. Still, the impeachment process, if it goes forward, will mostly be political theatre that may or may not sway a small sliver of voters in the 2020 election who aren’t already committed partisans on either side, no-matter-what.

The other two development rubbing risk sentiment the wrong way were Trump’s rather belligerent speech on Iran and China before the UN yesterday, in which he accused China of gaming the system, and the shock weakening in US Consumer Confidence this month, particularly for expectations, which looks a bit more serious this month, given that the last time we saw weakening confidence it was clearly linked to the cratering stock market in late 2018. We discussed these developments and more in this morning’s podcast, by the way.

Yesterday’s latest chapter in the never-ending Brexit drama saw a brief further sterling rally attempt as the UK Supreme Court ruled that Boris Johnson’s move to prorogue (suspend) parliament was illegal, frustrating his efforts to go it alone in the final weeks of negotiation with the EU before the October 31 deadline. The market’s kneejerk reaction is that this is good for sterling as it lowers the risk of a chaotic exit on October 31, but the market is right to show caution today, as we are no closer to clarity on the Brexit process here. Parliament will reconvene today and we should be wary of reading the headlines hammering on Johnson as embattled and defeated, as the situation may play into Johnson’s and the pro-Leave hands in an election and/or referendum scenario that it seems we must have in the event of a delay.

Chart: GBPUSD
Cable could take a drastic turn for the worse here as an extension of Brexit dysfunction for the rest of this year, even if we avoid the immediate risk of a cliff edge scenario at the end of next month, will only make the gathering clouds over the UK economy worse still on a weak credit impulse and business confidence weakening further. 1.2500 is an important level on the chart for all manner of technical reasons (round level, prior low, and Fibonacci retracement. A test of the cycle lows near 1.2000 is a base case for bears, using the 1.2500 pivot area (with a cushion) as the stop for short positions.