Sterling suffers largest one-day drop in six years - Brexit volatility set to continue
23/Feb/2016 • Currency Updates•
Uncertainty around the outcome of the EU referendum, now scheduled for 23 June, continued to intensify on Monday. The Pound subsequently suffered its largest one-day drop against the US Dollar during David Cameron’s six years as Prime Minister. Currency movements such as this have been adding to the pressure on international businesses to implement a plan to cover their foreign currency exposure sooner rather than later.
Sterling plunged by over 2% against the US Dollar at one stage, falling back to a seven-year low after a number of senior Conservative MPs, notably London Mayor Boris Johnson, voiced their intention to join the ‘leave’ campaign.
The Pound ended the day as one of the worst performing major currencies in the world, having now tanked by almost 6% since the beginning of December.
Citigroup claimed that the chances of Britain leaving the EU had risen to 30-40% following last weekend’s developments, while bookmakers’ odds increased to around 33%. Businesses are now busy putting contingency plans in place.
Higher chances of a Brexit proved bad news for the Euro too, given its potential to damage the European economy and the Euro.
The single currency fell sharply to its weakest position in three weeks against the US Dollar and to a two-and-a-half year low against the Japanese Yen, with weak services and manufacturing data providing a further drag on the Euro.
EU referendum developments will no doubt dominate the news wires once again today. From a data perspective, Germany growth figures this morning and the US consumer confidence index this afternoon will be worth watching out for.
Major currencies in detail:
A sharp decline during the Asian trading session was followed by a further 1% decline during London trading, causing the Pound to end around 1.75% lower against the US Dollar from Friday’s close.
Ratings agencies Moody’s and Fitch both claimed that a Brexit would cause a short-term economic cost to the UK and pose ‘significant’ long-term risks. Moody’s even suggested that it would assign a negative outlook to the country’s Aa1 credit rating.
With few top-tier economic announcements in the UK this week, EU referendum expectations will likely dominate trading.
Concerns over the impact of a Brexit on the Eurozone sent the Euro 0.7% lower against the US Dollar yesterday.
Domestic economic data in the Eurozone was relatively mixed on Monday. Growth in the manufacturing sector of the economy slowed down sharply in February, fuelled largely by a disappointing performance in Germany. The German PMI tanked to 50.2, its lowest level since December 2014, with the overall index of 51 representing no more than a very modest expansion.
Service sector growth was similarly disappointing. The services PMI declined to 53 from 53.6, with a contraction in France proving particularly underwhelming.
German GDP figures this morning will be followed by the monthly IFO confidence indices from Europe’s largest economy.
The US Dollar performed strongly as markets opened for the week on Monday, with a further rebound in stocks and oil prices providing good support for the Greenback. Gains against most of its major peers allowed the US Dollar index to finish 0.5% higher.
Yesterday’s rally in the Dollar came despite some underwhelming manufacturing data that didn’t bode well for first-quarter economic growth in the US. The latest manufacturing PMI from Markit declined far more than expected, falling from 52.4 to 51, which barely represents an expansion in February.
A strong US Dollar and a China-induced global slowdown among emerging market economies continue to weigh on exports from the US, particularly in the manufacturing sector.
This week should prove a busy one in the US, with a number of significant economic announcements all likely to affect the US Dollar. Consumer confidence data this afternoon will be followed by durable goods orders on Thursday and fourth-quarter growth figures this Friday.
Rest of the world
The New Zealand and Australian Dollars were the stand-out performers in the G10 on Monday, with both appreciating over 1% against the US Dollar amid a stabilisation in commodity prices.
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