US Dollar falters on weak labour figures, Sterling tumbles following latest Brexit polls
06/Jun/2016 • Currency Updates•
The US Dollar rally came to an abrupt halt last week. The weak US May labour report has led markets to price out a further interest rate hike by the Federal Reserve at its next meeting. It’s now become unlikely that we’ll see more than two hikes before the end of the year.
This repricing led traders to sell the Dollar against almost all of its major peers. Consequently, the Greenback recorded one of its worst weekly performances in months, ending the week 2% lower against the Euro.
The only other major currency that suffered significant losses last week was Sterling, which was yet again down to Brexit polls. The latest polls suggest a Brexit result is still a real possibility. Last week Sterling actually fell against every major currency, including the weaker US Dollar.
International businesses now focus on Fed Chair Janet Yellen’s testimony on monetary policy later today. She’s expected to shed further light on her expectations of rate hikes for the remainder of 2016, in view of last Friday’s disappointing labour report. Markets are expecting she will hint at no more than one hike for the remainder of the year.
Otherwise this week will be data-light, so political events will take center stage. Referendum debates on Tuesday and Thursday constitute the main event risk for Sterling.
Major currencies in detail:
Sterling had a rough ride last week. The euphoria, which developed as polls put the ‘remain’ side comfortably ahead, dissipated as new polls painted a far more competitive picture of the EU referendum.
Bookmakers have increased their odds of a Brexit result from 20% to around 27%. However, our preferred predictor by Number Cruncher puts no more than a 22% chance on such an event.
Although largely ignored by markets, the leading PMI business indicator index improved modestly to 53, a level that is consistent with GDP growth in the 2% range. This is a fairly decent result amid the referendum uncertainty, and we could see a fairly significant bump in business confidence if, as we expect, the UK votes to remain in the EU on 23 June.
As expected, the ECB left policy rates unchanged last week. ECB President Draghi toed a careful line, disappointing some commentators who had expected a modestly hawkish turn.
There were some small revisions to Eurozone inflation forecasts. While Draghi mentioned that the balance of risks had improved modestly, he also insisted that the ECB is ready, willing and able to increase stimulus if the current measures fail to achieve their goals.
We expect no great change in either ECB rhetoric or policy until at least the September meeting. Hence, the ECB will fade from the headlines and the Euro will trade in line with two factors: Firstly, the rhetoric of Fed officials and secondly, the calendar of political risks.
In addition to the UK referendum, the Spanish elections on 26 June could lead to a Podemos-led government and potential confrontation with Brussels over spending plans and Spanish deficit reduction timetables.
We saw the weakest US labour market report in almost six years last week.
Just 38,000 net jobs were created and the previous two months’ numbers were revised down. Unemployment dropped sharply to 4.7%, but this was mostly driven by a drop in the labour force and hence will have little effect on the Fed outlook. However, it was positive that wage increases remained steady at 2.5% on the year.
This disappointment all but rules out the possibility of a June rate hike. A July hike is dependent on a strong rebound in next month’s labour report that eases concerns about a weakening US economy. We expect this to be the key message in Yellen’s address on monetary policy today.
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