Stocks and commodities rebound, EU referendum causes Sterling volatility

Enrique Díaz-Álvarez22/Feb/2016Currency Updates

Stocks and commodity markets worldwide rallied last week as bargain hunters snapped up cheap assets and investors priced in further monetary easing from the European Central Bank and the Bank of Japan.

The major event in Europe last week was David Cameron’s deal with the European Union, winning ‘special status’ for the UK. The date of the referendum has now been set for 23 June.

Sterling rose sharply into Friday’s close. However, all of these gains were lost this morning when London Mayor and Conservative Boris Johnson announced his intention to campaign for Britain’s exit from the EU.

Most emerging market currencies benefitted from an increasing risk appetite and continued to rally from recent lows. The Mexican Peso, helped by a surprise rate hike by the central bank Banxico, and the South African Rand, deserve special mention.

Major currencies in detail:


Although market focus was on the Britain’s negotiations with the EU, we received some significant economic news last week.

The labour market continues to generate jobs but with little sign of wage pressure. December employment rose sharply, by 28,000 jobs, and the unemployment rate remained at its lowest level since 2005, at 5.1%. However, average weekly earnings dipped 0.2% to 1.9%. Core inflation also dropped 0.2% in January, to 1.2%.

The absence of inflationary pressure gives the Bank of England scope to delay an increase in rates until at least late 2016, although we think interest rate markets are wrong to price in no hikes until 2019, as they are currently doing.

Sterling largely ignored this macroeconomic data as traders continue to focus on the likelihood of a Brexit, with a referendum now set for June. Although polls so far show the pro-EU side ahead, support for a Brexit by Boris Johnson will continue to provide downward pressure on Sterling over the short term.


We had a very quiet week in terms of Eurozone economic data.

The only release of note was the ZEW indicator of investor expectations, which often acts as a leading indicator of growth. The news was not reassuring, as the measure tumbled for the second straight month.

If this downbeat news is confirmed by next week’s key business sentiment PMI indicators, this will only add to the massive pressure building on the ECB to act aggressively at its March meeting.

In addition to the widely expected cut of the repo rate further into negative territory and an expansion of the QE programme, some savvy analysts are expecting significant expansion to the range of assets to be purchased by the ECB. This could potentially extend to bank loans rather than just sovereign debt.

This isn’t an environment conducive to Euro strength.


The US economy continues to defy the worldwide slowdown and deflationary pressures.

We saw a significant upward surprise in January inflation. The key core indicator, which strips out volatile food and energy components, rose much sharper than expected, at 2.2% for the year. This indicator is now squarely within the Federal Reserve’s long-term target and appears to validate the strength in January wages seen in the labour report.

These solid inflation numbers are incompatible with interest rate market expectations for less than one full hike in the whole of 2016. Our view is that as these expectations are corrected, we’ll see the Dollar rallying gradually over the next few quarters.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.