All Eyes On DXY Highs.

DXY Surpasses 108.5

The DXY has continued its upward trajectory and has exceeded 108.5 this morning as EURUSD teeters on the edge of parity. This means that the DXY is now at its highest level in 20 years as investors weigh on the growing interest rate differential between the Fed and other major central banks (particularly the ECB) in addition to the prevailing risk off sentiment and concerns over a looming recession across the global economy.??

Following last month’s FOMC meeting where the Fed raised rates by 75bpts to 1.75%, Powell’s subsequent hawkish comments suggested that another 75bpt hike may be likely at the next rate decision on Wednesday 27th?July. This thus altered the dot plot somewhat with the Fed expecting the policy rate to hit 3.4% by the end of Q4 2022 with a number of 50bpts hikes on the cards before falling back to more moderate 25bpt hikes.

Conversely, the ECB’s base interest rate currently stands at 0.0% while its deposit rate remains at?-0.5%. Next Thursday the ECB will announce their monetary policy decision where markets have pretty well priced in 30bpts of hikes, which is thus indicative of the difference between the Fed’s aggressive rate hikes and the ECB’s more muted course.

The health of the Eurozone has also come into question with growing spreads between the German benchmark 10-year bond and those of peripheral members, particularly Italy and Greece. Recession fears are also continuing to mount across the Eurozone and the energy crisis (explored below) looks as though it will continue to deepen as gas supplies from Nord Steam 1 stop, sending TFF futures (the European benchmark) to €170 a megawatt-hour this morning?– close to a four-month high.

Policy Makers Plan for Energy Rationing on the Continent

Experts are continuing to warn over the prospect of longer than expected outages from Nord Stream 1 with policy makers preparing plans for emergency energy rationing.?Nord Steam 1’s gas supplies coming from Russia to the continent are currently nil due to?‘planned maintenance’ which is said to be running to 21st July. However, as looked at yesterday, concerns are increasingly mounting that Gazprom and the Kremlin may look to extend this outage putting further pressure on Europe’s economy and yielding Russia further leverage in Europe’s energy crisis. Given that 40% of all gas exports from Russia to Europe flow through Nord Stream 1, the prospect of this extended loss of supply (critical particularly to Germany’s gas security) has seen TFF futures – the European benchmark – trade at around 170 euros a megawatt-hour this morning. This currently puts gas futures on the continent close to a four-month high.

Labour to Table Vote of No Confidence

Labour have announced that they will table a vote of no confidence in the government, which would require a simple majority of over 50% of MPs in support of the motion to trigger a general election. This follows the 1922 Committee announcing that Boris Johnson will remain as PM until 5th?September, which has disgruntled Labour who are calling for him to go immediately. While frustration amongst Tory backbenchers is palpable, the Conservatives still hold a majority of 73, and thus assuming that all Opposition members vote in support of the no confidence motion, it would still require a significant number of Tory rebels to pass, which given current opinion polls (explored below) it appears unlikely that any Conservative would want to risk an election now.?????????

Snap Election?

Some speculation has been mounting over whether a new Conservative leader may call for a snap election, however this appears highly unlikely for the reasons below. Under the Fixed-term Parliaments Act 2011 (FTPA), a supermajority (two thirds of the House of Commons) is needed to vote in favour of a snap election. (The FTPA being introduced during Cameron’s coalition to mitigate the risk of the Lib Dems calling for a snap election and ousting the Conservatives from power ). Given that polls currently place Labour ahead of the Conservatives (by around 7.3 percentage points), its unlikely that Tory MPs would vote in favour of a snap election, since this would likely lead to many members of the Parliamentary Conservative Party losing their seats, and subsequently push the Tory’s away Government. Indeed, if current polling is accurate, this could see 108 Conservatives lose their seat.

A new Conservative leader would therefore be unlikely to call for a snap election and face loosing (a) governmental power and (b) their 73 Seat majority.

There is also no precedent for a PM who assumes office outside of a general election to call for a snap election and secure a personal mandate. While it has been the case that snap elections have been called shortly after a leader assumes office (take Johnson for example who called a snap-election for Dec 2019 after taking on the top job in Jul 2019), these tend to be done when polls favour doing so. The British political make up also means that Prime Ministers who first take office outside of winning a general election is more common than not, in fact since 1900, 11 PMs first assumed power following a GE, against 16 who have not. Therefore, in all likelihood it is unlikely that we see a snap election being called from a Tory leader any time soon. As per the FTPA, the next general election is set for a date no later than Jan 2025.?