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Roses are red, violets are blue, something something, loose fiscal policy

For somebody who spent a good number of years filling column inches with his disdain for the policies of Tony Blair and Gordon Brown, Boris Johnson’s new government is shaping up to be one firmly embracing a great deal of what defined much of the latter’s tenancy of both Number 10 and Number 11 Downing Street. We got the first sign of things to come when he announced his support of the highly controversial High Speed Rail 2 project. Would Boris Johnson in opposition support the GBP13 billion splurging of state spending? Almost certainly not. But this is not the libertarian small-state Boris Johnson of the Daily Telegraph. This is big spending, state intervention, pension tax relief-scrapping Prime Minister Boris Johnson. For a while there had been plenty of chatter from journalists about the rift between Boris Johnson’s strategist Dominic Cummings and the now former Chancellor of the Exchequer Sajid Javid. However yesterday’s shock resignation confirmed it. Reportedly offered the opportunity to continue as Chancellor in exchange for firing his team (and replacing it with one more aligned with the Johnson/Cummings view on spending), Javid promptly turned down the position and was very quickly replaced by Rishi Sunak. So what does this mean for sterling? Despite some stronger post-election, post-Brexit data, the pound has struggled to make any real headway. It had been under pressure on rumours of a January rate cut from the Bank of England, but even when the stronger data slashed expectations of action from the MPC, the pound struggled to make ground. However, sterling rallied strongly on yesterday’s shock news, breaking above that 1.2000 psychological barrier to EUR1.2078 while against the dollar it remains above USD1.3000. Much of this is on the view that the Cabinet is now entirely stacked with “Yes Men” that will give their wholehearted backing to Boris Johnson and Dominic Cumming’s plans to spend like a sailor on shore leave. With the Government pursuing loose fiscal policy it seriously diminishes the Bank of England’s freedom to cut rates any further than their ultra-low levels. The latest UK CPI numbers will be released by the ONS on Wednesday, but while inflation is currently running below the BoE’s 2 percent target rate at 1.4 percent, policymakers will be aware that in loose fiscal conditions, once out of the box inflation is very difficult to recapture again. To discuss any of the items we have covered in today's market update, contact us via or call us on (+44) 0203 3488 1169

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