Last night Boris Johnson’s government lost a crucial vote in Parliament, the first step of a cross-party motion to prevent the UK leaving the European Union on Oct 31st without a deal. Parliament voted 328 – 301 in favour of the bill which has effectively removed one of the UK’s key bargaining tools to secure a satisfactory withdrawal deal. Opposition MPs and rebel Conservatives were uncomfortable with Johnson’s robust actions, claiming it could be catastrophic for the UK economy.
The result leaves Johnson in a similar ‘hands tied’ position to his predecessor Theresa May and in attempt to avoid any further deadlock, Johnson immediately called for a snap general election under the Fixed-Term Parliaments Act. However, two thirds of parliament would need to approve the motion and opposition leader Jeremy Corbyn said last night he would not back the move.
MP’s reconvene today to vote on the second reading of the bill which would force the PM to seek a delay of the Brexit deadline to Jan 31st.
The pound had a mixed day yesterday, initially falling amidst the political uncertainty, in particular against the US dollar. Barring the flash crash in October 2016, where for a few minutes during Asian trading the pound dropped to a low of 1.1491, the pound fell to its lowest level against the US dollar since 1985 during Margaret Thatcher’s 11-year term as Prime Minister.
GBPUSD opened yesterday morning on the decline, having fallen overnight the pound touched a low of 1.1961 shortly after markets opened but steadily strengthened as the day progressed, reaching a high of 1.2100 ahead of the evening vote in parliament.
GBPEUR also fell as markets opened eventually bottoming out at 1.0932 shortly after Tuesday’s trading began but like GBPUSD, the pound recovered as the session continued reaching a high of 1.1033.
The euro fell to a 28-month low against the US dollar as investors priced in deeper negative interest rates in the Eurozone for a longer period than first thought. Investors have now priced in a more than 80% chance that the European Central Bank will cut interests rates from the current -0.40% by a further 20 basis points.
The US dollar strengthened in the morning as the trade dispute between the US and China intensified and investors bought US Treasuries, often seen as the safest assets to hold during times of economic turmoil, increasing US dollar buying. The dollar index rose to 99.37, its highest level since May 2017.
However, the dollar’s gains were short lived, US manufacturing output contracted in August for the first time in over 3 ½ years suggesting the global slowdown which has affected many economies around the world has now had an impact on the US economy. ISM Manufacturing fell from 51.2 in July below the crucial level of 50 which indicates growth/contraction to 49.1, markets were expecting a slight rise to 51.3.
EURUSD opened at 1.0932 and fell to a low of 1.0926 but following the ISM data the euro managed to recover to reach a high of 1.0976.