Sterling soars most in eight years on fading Brexit concerns
21/Jun/2016 • Currency Updates•
The Pound surged yesterday, with the currency continuing to benefit from the growing belief that Britain will vote to remain a member of the European Union at this Thursday’s referendum.
A string of opinion polls in the last few weeks put the leave campaign marginally ahead, but polls released over the weekend have eased these concerns.
Surveys from YouGov and Survation both showed a slight boost in support for the ‘remain’ campaign, with a matter of days to go until the referendum. This swing back in favour of the vote to ‘remain’ has sent bookmaker’s odds of a Brexit to around 25%, down from in excess of 40% a matter of days ago.
The reaction in Sterling was sharp and unprecedented, with the currency rallying in excess of 2% against the US Dollar and, in the process, notching its largest one-day gain versus the Greenback since the volatile depths of the financial crisis in 2008. With Sterling now trading based on opinion polls and nothing else, violent swings in the Pound are to be expected throughout the rest of the week.
Join our twitter chat on June 22 at 3pm. We’ll be discussing what to expect from Sterling on referendum day.
The reversal in risk-off trading that has dominated the currency markets so far this month weighed heavily on lower risk assets. The US Dollar and Japanese Yen both fell, the former under pressure from a relatively dovish Fed monetary policy statement last week.
Meanwhile, in the world of emerging market currencies, the Nigerian Naira plunged by over 30% on Monday after the Central Bank of Nigeria removed the currency’s peg against the US Dollar and allowed the Naira to float freely. The central bank has been under intense pressure to remove the peg following a sharp decline in oil prices and depletion of the country’s foreign exchange reserves.
Major currencies in detail:
Sterling rallied by a remarkable 2.3% against the US Dollar from Friday’s close and 2% versus the Euro yesterday as waning concerns of a Brexit unwound much of the Pound’s sharp decline in recent weeks.
One week implied volatility in the GBP/USD pair fell from its record high 50% on Friday, although remains very lofty at around 38%.
As we had anticipated, the recent moves in Sterling are likely due to the shift towards the status quo in the final few days before the EU referendum.
The Pound will be driven by the referendum alone this week, with all economic data releases rendered inconsequential.
After rallying quite sharply during Asian trading, the Euro declined by 0.2% against the US Dollar on Monday, despite renewed support for Britain’s ‘remain’ campaign.
The prospect of a Brexit is now dominating the newswires in Europe as well as in Britain. The head of Germany’s BGA trade federation issued a fresh warning, suggesting that a Brexit would be a ‘poison’ for economies in Europe.
In terms of economic data, construction output remained weak, falling by 0.4% in the year, while producer prices in Germany also fell, declining by 2.7% in the twelve months to May.
With focus this week almost entirely on the UK’s referendum, announcements in the Eurozone will take a back seat. President of the European Central Bank Mario Draghi will, however, be speaking in Munich this afternoon at a committee on Economic and Monetary Affairs.
Yesterday’s violent decline against the Pound sent the US Dollar index 0.3% lower on Monday.
Economic data in the US on Monday was thin, with investors instead focusing on events later in the week.
The US currency remains under pressure following comments from Janet Yellen at last Wednesday’s FOMC meeting. Financial markets are now pricing in less than a 10% chance of a rate hike at the Fed’s next meeting in July, although we expect this to increase should Britain vote to ‘remain’ in the EU this week.
Federal Reserve Chair Janet Yellen will begin her two day testimony in front of Congress in Washington today. Any additional comments on monetary policy could move the US Dollar this afternoon.
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