UK businesses with Euro or Dollar exposure watch carefully as Sterling increases again

Enrique Díaz-Álvarez07/Mar/2016Currency Updates

Generally, sentiment improved across financial markets last week. Equities, commodities, crude oil, emerging market currencies and, last but not least, Sterling benefitted from an increasing risk appetite.

This was welcome news for US Dollar and Euro buyers who’d been worried that budget levels were coming under threat or even being eaten into because of the sharp move against Sterling. The weak Pound represented a great opportunity for Dollar and Euro sellers to hedge at levels which no one had predicted at the start of 2016.

Markets seemed to have been pricing in a virtual certainty of a Brexit result in the EU referendum in June. We’ve been saying for some time that this is premature and the Pound is undervalued. We believe that after last week’s 2.5% rally against the US Dollar the Pound is now closer in line with the still fairly positive fundamentals of the UK economy.

Emerging markets continued to rebound last week, which confirms our view that these assets and currencies are currently undervalued.

Businesses continue to worry about the possibility of a further rally in the Japanese Yen. The other major question is still whether or not there will be Fed interest rate hikes in 2016. We think there will be, and the US payroll report on Friday supports our view.

All eyes are now on the critical ECB meeting this Thursday. We will be putting out a special report and will keep you posted on the outcome. Join the discussion on Twitter during the ECB press conference on Thursday, using the hashtag #EburyChat16.

Major currencies in detail:


Overall, Sterling performed much better against both the Euro and the US Dollar last week.

We received quite disappointing news from the critical PMI business sentiment indicators. The composite index printed a huge decline of 3.4 points, to 52.8.

Comments from managers suggested that uncertainty surrounding the Brexit referendum played a major role in this decline. This news certainly increases downside risks to our forecast for UK growth, which currently stands at around 2%.

However, the most recent opinion polls still give a small edge to the ‘in’ campaign and we expect that result to have a very positive impact on UK GDP growth in the second half of the year.


The Euro mostly marked time against the US Dollar, rising less than 1% for the week as traders await the outcome of Thursday’s ECB meeting.

However, the key inflation release out of the Eurozone last week provided a significant shock for the markets.

The Eurozone fell back into deflation, as lower energy prices pushed the annual rate down to -0.3%. Perhaps most surprising, however, was the huge 0.3% fall in the core measure, which is usually more stable. The measure declined to 0.7% and barely above its all time low of 0.6%.

These numbers put even more pressure on the ECB to act on Thursday.

We expect significant announcements on a variety of fronts, including interest rates, QE and measures to ease the downward pressure on bank profitability. This key meeting will be the focal point this week for the Euro and we can expect some volatility in the days leading up to it.


Markets were focused on Friday’s US payroll report for any signs that global financial wobbles and economic slowdown were having an impact on US hiring. Clearly they’re not.

The US economy generated 242,000 jobs in February, and the previous two months’ numbers were revised up a combined 30,000. This puts the average pace of job creation at around 225,000, a very healthy pace this late in the cycle.

Unemployment remained at 4.9%, but crucially the labour force participation rate ticked up 0.2%, in a sign that the tight labor market is starting to attract new entrants into the labor force.

The only downside was a disappointing down tick in wages, down 0.1% for the month after the 0.5% surge in January.

The message for the Fed is clear: While there are no immediate worries about wage inflation, the US domestic economy has not been impacted by market volatility. Yet, the interest rate market is pricing in less than one full Fed hike in all of 2016. This is a serious mispricing, and once it corrects we expect to see the Dollar resume its upward trend.


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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.