After the last month’s BRexit drama, the UK is now heading towards the general election scheduled on 12th December. This will be the third election in the last four years. At present, the BRexit has been deadlock as the UK Prime Minister Boris Johnson lacks a majority in the parliament to move the UK out of the EU. According to him, the election can help the Conservative party (the Tories) secure the required majority while ending the BRexit deadlock. Now political parties will get enough time to campaign and highlight their latest position regarding the BRexit.
At present, the UK is facing both political and economic challenges. The BRexit deadline has also been extended till 31st January, from 31st October. However, the UK parliamentarians are having re-think on whether the UK actually wants to move out of the EU or not. Because the Brexit, if happens, will ensure catastrophic economic challenges. The mood among voters also seems to change. There are talks of the second referendum after the election result. If the opposition Labour Party wins, it will seek to negotiate a new deal and hold a referendum on it, potentially overturning the decision to leave the EU. Hence, the market will keenly monitor such developments.
On the other hand, the performance of the key UK economic data continues to be weak. The manufacturing PMI is consistently falling sharply. Inflation remains subdued while the GDP growth is faltering. Retail sales, industrial and manufacturing production are also falling. The trade deficit has widened to £4.03 billion in September, from £2.20 billion in the previous month. The global economy is also in a dire state. Hence, the pressure is building on the BoE to cut the interest rate. The BoE kept interest rate unchanged in the monetary policy meeting earlier this month. However, two policymakers voted to cut interest rates. This indicates that the BoE might ease its monetary policy further in coming months. Its major counterparts, the Federal Reserve and the ECB have already cut interest rates in recent months.
Hence we think that the pound may turn bearish ahead of the election result.
Author: Mr. Rushabh Maru, Research Analyst – Currency & Commodity (Investment Services), 22nd November 2019