Boris Johnson resigns Blog

GBP – Boris Johnson resigns, replacement process underway

Boris Johnson resigns as Prime Minister, with the party eventually turning on him.  This week, the Conservative Party’s 1922 Committee will confirm the timetable and process to choose a new Prime Minister.  The expectation is that the process will be complete with a new leader/PM in place by September.  The market reaction to this political turmoil was limited. Perhaps a new leader may be seen as the potential for a stabilising influence and a less fractious approach to post-Brexit interactions. Sterling does remain weak against a universally strong dollar, falling below 1.20. 

Last week, June services PMI was revised up to 54.3, though the future output fell to the lowest level since May 20I20.  Price indicators remain near record highs with semiconductor shortages resulting in a 24.3% fall in new car registrations. The Bank of England’s Chief Economist, Huw Pill, said that he is open to a larger 50bp hike at the next meeting. The Bank’s ‘Decision Maker Panel’ survey of businesses showed a further rise in inflation expectations compared with the last report in May.

This week, the highlight will be the monthly GDP figures for May. The economy grew 0.8% in the first quarter, though the trend has been slowing since January.  The fall of 0.3% in April starts the second quarter weakly, and May and June will be hard to quantify with the Queen’s Platinum Jubilee in June. We expect a small rise of around 0.4% in May, with an extra working day. This may mean a stronger May figure, but a much weaker June number, which may pull the overall second-quarter into contraction.  This will leave the Bank of England with further balancing, with weakening economic growth. 

GBPEUR – 1.1813

GBPUSD – 1.1979


EUR – German trade deficit and €$ close to 1:1

The euro had a tough week last week, falling close to parity against the US dollar.  This is a 20-year low and came as Germany recorded its first good trade deficit since 1991.  This was largely due to much higher imported energy costs since Russia’s invasion of Ukraine.

The minutes of the ECB’s June meeting confirmed they are likely to hike 25bps later this month.  They also keep a possible 50bps rise on the table for September.  The ECB continue to look a long way behind the curve as the Bank of New Zealand (+50bps to 2.5%) and Bank of Canada (+75bps to 2.25%) both look set to raise rates aggressively again this week.

This week, we will get a further check-in with the German economy with the ZEW survey.  The industrial production numbers will also be closely watched following the relative weakness in the German economy.

EURUSD – 1.0140

EURGBP – 0.8465


USD – Non-farm payrolls strong, pay growth slows

Last week, the June ISM services survey fell less than expected to 55.3,  This is still showing solid expansion territory, despite edging down in the past two months. Non-farm payrolls grew by 372,000 in June with the unemployment rate staying at 3.6%.  This takes employment back to pre-Covid levels. In better news for the Federal Reserve, annual wage growth fell slightly to 5.1%. Although the labour market is still tight, it appears to be cooling. The minutes of the Fed’s June policy meeting confirmed that interest rates will rise further.  A 75bp increase to 2.25-2.50%is likely at the next meeting at the end of July. 

This week, the CPI and PPI inflation figures for June will be released.  Markets expect CPI to rise again to 8.8%, which would be a 40-year high due to rising energy and food prices. Core inflation will likely ease again to 5.8%. PPI inflation is likely to remain elevated, suggesting that there are still substantial cost rises in the pipeline.

Retail sales were weak in May, but are expected to bounce back this month.  The University of Michigan consumer sentiment data is also at a weak level around 50, with the inflation data closely watched. Weaker data is unlikely to stop the Fed from tightening policy further later this month.  It may mean lead them to acknowledge that growth is weakening and may change their future forecasts and actions. 

GBPUSD – 1.1979

EURUSD – 1.0140


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*Interbank rates correct at 7 am on the date of publishing.