New Prime Minister brings confidence to the markets

GBP

Yesterday the market took time to digest the news that the UK will have its third Prime Minister for the year with former Chancellor Rishi Sunak winning the race to become the next PM after Boris Johnson pulled out of the race and Penny Mordaunt also conceded. This saw the pound gain against the euro after losses from the previous week.

Sterling initially rose as a result of the market deeming Mr Sunak as the most economically prudent of the candidates whilst being better equipped to take the UK through its gloomy economic outlook. The gains for the pound were quickly tempered after UK PMI data showed that business activity slowed to a level last seen in January 2021 lockdown falling to 47.20 down from 49.1. Service and manufacturing sectors both fell by more than expected with a reading below 50 showing contraction.

The market will now turn its attention to Sunak as he battles the energy crisis, cost of living crisis, the war in the Ukraine and the £40bn black hole in the UK’s finances.

Earlier on Monday Guy Hands a long term Tory supporter and financier said the Conservative party was not fit to run the country and risked having to ask for a bailout from the International Monetary Fund. He also warned that there would likely be higher taxes, reduced public services and higher interest rates which will result in a bailout from the IMF, a situation last seen in the 70’s. The Institute for Fiscal Studies think tank predicted borrowing this year could reach £194bn, almost double the figure previously forecast by The Office For Budget Responsibility.

On a more positive note, the Deputy Governor of the Bank of England Sir Dave Ramsden said that the central bank was “engaging” with the Treasury on the upcoming economic plan, This was after the BoE was not consulted over the mini-budget that was announced four weeks ago. Sir Dave also told MPs on the Treasury Committee that the recent improvement in gilt yields – the effective interest rates on government borrowing – had shown that “credibility is returning to British economic policy”.

EUR

The euro held relatively firm against both the US dollar and the pound even after posting weak PMI data. The eurozone composite fell to 47.1 in October down from 48.1 in September. Germany considered the power house of the Eurozone economy was particularly weak as their PMI fell to 44.1, which is a level that was last seen back in May 2020 when the country was in lockdown. The same issues that are hurting the UK economy are the same for Europe with energy costs and supply chain disruption hitting manufacturing whilst the cost of living hits consumer demand.

Later today data from German IFO business confidence will be released, which will likely see a further downturn as a result of yesterday’s poor PMI’s.

Key announcements

09:00 – EUR – German IFO Business confidence

09:55 – GBP – MPC Member Pill Speaks

15:00 – USD – CB Consumer Confidence