Sterling rallies on oil price rebound but Brexit fears limit gains
19/Apr/2016 • Currency Updates•
Sterling rallied to a near-one-week high against the US Dollar on Monday, with a rebound in global stock markets and a recovery in oil prices increasing demand for higher-yielding, riskier assets.
The Pound shrugged off comments earlier in the day from Chancellor George Osborne, who claimed that a vote to leave the EU at this June’s referendum would leave the UK economy 6% smaller by 2030.
A matter of days after official referendum campaigning began, Osborne echoed comments from a number of leading economists by suggesting Britain would be ‘permanently poorer’ if it left the EU.
Oil prices staged a strong recovery on Monday, having plunged as the market opened after attempts by some of the world’s largest oil producers to freeze output on Sunday night ended without a deal. This led to a volatile trading session for commodity-driven currencies and the safe-haven Yen, which finished the day lower despite rallying sharply during Asian trading.
Among emerging markets, the Brazilian Real sank more than any other currency after the Brazilian Parliament voted to start impeachment proceedings against President Dilma Rousseff.
With a light economic data calendar this week, focus in the global currency markets will be on the European Central Bank’s monetary policy meeting on Thursday. The Euro rose modestly against the US Dollar on Monday, although looks likely to remain range bound ahead of the ECB meeting.
In the meantime, Bank of England Governor Mark Carney will be speaking at the Economic Affairs Committee hearing this afternoon. Carney is expected to comment on the UK’s general economic outlook, with any mention of monetary policy likely to prove a market mover.
Major currencies in detail:
Monday represented a moment of respite for UK importers, with the Pound ending 0.9% higher against the US Dollar and appreciating to near a three week high versus the Euro.
Economic announcements were limited on Monday, with markets fixated by the EU referendum. The latest polls over the weekend continue to show a lead for the ‘in’ campaign, albeit by only a modest margin.
Adding to investors’ concerns, Scotland’s First Minister Nicola Sturgeon claimed over the weekend that a British exit from the EU would necessitate a new referendum on Scottish independence. One year volatility and six month volatility in GBP/USD, seen as good indicators of market concern of a Brexit, remain around multi-year highs and above that of EUR/USD.
No economic data in the UK today means that all attention will be on Governor of the Bank of England Mark Carney. The monthly labour report on Wednesday marks the next data release on the UK agenda.
The single currency rose by 0.4% against the US Dollar on Monday, recovering somewhat following its sell-off towards the back end of last week.
Trading in the Eurozone was relatively light on Monday, with no major economic releases. Investors instead await this Thursday’s European Central Bank meeting.
The central bank is universally expected to leave both its main interest rate and quantitative easing unchanged. Focus will instead be on the statement and press conference.
Markets are eager to hear the council’s reaction to recent Euro strength and, critically, any impact this may have on future monetary policy. Clearly Euro strength is against the objectives of the ECB and, whilst having provided Eurozone importers with breathing space of late, Draghi’s comments will surely have to address this.
Economic data in Germany will be the focus this morning, with the monthly confidence surveys from ZEW expected to show a modest improvement this month, which could provide some support for the Euro.
Losses against the Euro and Pound contributed to the US Dollar index falling for the third straight London session, ending 0.2% lower.
Federal Reserve New York President William Dudley spoke yesterday, reiterating the Fed’s view that US interest rate hikes will be gradual and cautious. Dudley commented that ‘significant uncertainties and headwinds to growth’ would prevent a faster pace of rate hikes.
Elsewhere, the National Association of Home Builders housing index missed expectations, remaining unchanged at 58.
Announcements in the US will be unusually light this week, with housing starts and building permits today the only major releases. Investors will have one eye on next week’s Federal Reserve interest rate announcement.
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