Brexit concerns drag Sterling down, US Dollar continues its upward trend

Enrique Díaz-Álvarez29/Feb/2016Currency Updates

Brexit fears weighed heavily on the Pound last week, while the US Dollar went up again. The two currencies ended the week 1% down and up respectively against the Euro.

The Dollar benefitted from strong macroeconomic data in the US, which could pave the way for more than one interest rate hike in the US this year. The Dollar gained against almost every other major currency last week.

The overhang of stale long Dollar and short Euro positions in trading markets, which we’d been pointing out for some time, has now largely cleared. The overwhelming consensus on a stronger Dollar that we saw in December has now disappeared. Paradoxically, this can be a good contrarian sign. Therefore, we now expect the US Dollar to resume its gradual rise against most G10 currencies.

UK businesses continue to focus on the upcoming central bank decisions, in particular the European Central Bank meeting in mid-March. Given how quickly the Euro has given up all of its February gains, investors are keen to hear the ECB’s decision.

Major currencies in detail:


With the date for the EU referendum now firmly set, Brexit concerns remain the main driver for Sterling. Boris Johnson and other prominent Tory leaders broke off with David Cameron’s campaign for the UK to stay in the EU. This was enough to spook currency markets and Sterling tumbled to its lowest levels against the US Dollar since the depth of the 2008 financial crisis.

Of note is, however, that the polls have remained relatively unchanged. In fact, the running average of the past six polls is now back to a 55-45 edge for the ‘In’ side. This is likely to have helped stabilise Sterling towards the end of the week, at least against the Euro.

This week we have the PMI business sentiment index figures. We think that they’ll remain at fairly elevated levels, above 56 for the composite PMI index. This would be compatible with the UK economy maintaining a cruising expansion speed around 2% a year, and a sign that the sell-off of the UK currency has gone too far.


Another week, another set of disappointing data out of the Eurozone.

The key PMI business sentiment indicators all dropped more than was expected. The composite index is now down to 52.7, its third consecutive drop. This is perhaps the most important leading indicator out of the Eurozone, and such a poor performance will certainly strengthen Draghi’s hand at the critical March meeting.

The Euro has now given up all of its February gains. It will be difficult for the common currency to perform well against other majors, including Sterling.

We expect to see quite aggressive measures being announced at the ECB’s March meeting, including further cuts of the Repo rate and an expansion of the quantitative easing programme. Let’s start the discussion on Twitter now – simply use the hashtag #EburyChat16. I’ll be hosting a Twitter chat with Dan Davies, Senior Research Advisor at Frontline Analysts, and my colleague Matthew Ryan during the press conference following the ECB Governing Council meeting.


Stronger-than-expected economic data out of the US boosted the US Dollar against every other major world currency.

Durable goods orders in January fully unwound their December decline. Core capital goods orders rose by 3.9% on the month – this is a useful proxy for capital expenditures. The January rebound should allay any recession fears.

GDP growth in the last quarter of 2015 was revised upward, and both personal income and spending in January were much stronger than expected.

The Federal Reserve will also be pleased with the core PCE inflation index rise to 1.7% from 1.4% in the month of January alone. We may see the Fed revise upwards its projections for future inflation soon. Current market expectations are that the Fed will hike no more than once in 2016 but we consider this to be the biggest disconnect between fundamentals and market prices today.


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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.