Brussels attacks fuel safe-haven flight, Sterling plunges
23/Mar/2016 • Currency Updates•
Yesterday the currency markets reacted with turmoil and volatility.
The deadly terrorist attack at Brussels international airport and metro station caused investors to flee from riskier assets, with the safe-haven US Dollar, Yen and Swiss Franc all rising as a result.
Sterling was particularly hit hard, falling by almost 1% against the US Dollar over fears that the attack in Brussels could boost the campaign for Britain to leave the European Union at this summer’s referendum.
Events in Belgium yesterday, coupled with political fallout following last week’s budget, has caused many analysts to increase their forecasted probability of a Brexit, with some bookmakers now placing the chance as high as 40%.
Many UK business have been investigating risk management strategies to protect themselves against any further Sterling depreciation. In particular, UK importers who, unless their risk has been mitigated, will now face relatively higher costs from overseas suppliers.
The Pound was also under pressure as rating agency Moody’s claimed that Britain’s credit rating is at risk. This follows last week’s budget statement, which revealed a significant downward revision in UK growth forecasts and an upward revision in deficit estimates. Moreover, the latest inflation data in the UK failed to show a meaningful pick-up yesterday, remaining at just 0.3% after some economists had anticipated a modest acceleration.
In the Eurozone, the latest flash PMI’s showed a welcome reversal following declines over the past two months. This alleviated some concerns surrounding a slowdown in first quarter economic growth in the Euro-area.
Elsewhere, the Hungarian Forint fell to a seven week low after a surprise interest rate cut, while the Central Bank of Nigeria unexpectedly hiked its rate by 100 basis points in order to curb high inflation.
With economic data relatively light on the ground today, the major currencies are likely to trade within a narrow band ahead of the long Easter weekend.
Major currencies in detail:
Sterling ended yesterday as the worst performing major currency in the world, falling by 0.9% against the US Dollar.
The UK currency received little help from the latest inflation figures after headline consumer prices grew by a meagre 0.3% in February for the second consecutive month. Core inflation, which strips out volatile priced products, also remained unchanged at 1.2% on an annualised basis. A lack of inflationary pressure in the UK economy is one of the main reasons behind the Bank of England’s decision to hold rates steady at their current record low levels.
Other figures released from ONS suggested that Chancellor George Osborne is close to missing his budget deficit target for the 2015/16 financial year. Government borrowing fell less than forecast last month to £7.1 billion.
There’s no economic data out of the UK economy today, meaning attention will likely turn to UK retail sales figures on Thursday morning.
The Euro ended 0.2% down against the US Dollar yesterday, partially recovering later in the day after its sharp fall following Tuesday morning’s attacks in Brussels.
Economic data out of the Eurozone was mostly positive on Tuesday. The latest services PMI for the wider Euro-area rose above forecasts, increasing to its highest level since December to 54 from 53.3 following stronger than expected growth in Germany.
The Eurozone’s manufacturing sector also grew again, albeit only modestly, with the index increasing by 0.2 points to 51.4. These increases provide welcome relief after the composite index, seen as a leading indicator of economic growth in the Eurozone, fell to a one-year low last month.
The European Central Bank’s economic bulletin on Thursday is next on the agenda in an otherwise quiet end to the week in the Eurozone economy.
Safe-haven flows into the US Dollar sent the Greenback 0.3% higher against its major counterparts yesterday.
In terms of economic indicator data, the monthly manufacturing PMI from Markit remained low, increasing marginally to just 51.4 and hovering around its lowest level in two-and-a-half years. A strong US Dollar and weakness in global demand continue to weigh on the US manufacturing sector.
US house prices also climbed by 0.5% in January according to data released yesterday. A lack of available homes in the US housing market is, however, continuing to hold back sales and drive up prices.
Mortgage approvals and new home sales data in the US this afternoon are unlikely to move the US Dollar today. Investors instead await durable goods data on Thursday and a speech from Fed member Bullard.
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