Sterling surges as Brexit fears ease, US Dollar rallies ahead of Fed meeting

Enrique Díaz-Álvarez25/Apr/2016Currency Updates

The main stories in the currency markets last week were Sterling’s strong rally against every G10 currency and the sharp sell-off in the Japanese Yen. Both currencies appear to be correcting the excessive moves of the past few weeks, with Japanese authorities making their discomfort with Yen strength increasingly clear.

Sterling received some respite from the weight of Brexit uncertainty. New referendum polls last week showed a decrease in ‘out’ sentiment, leading to Sterling gains.

Businesses are closely watching this situation as additional Sterling strength this week could provide a good opportunity to set exchange rate levels before volatility recommences in the run up to the referendum on June 23.

In this context, the two major central bank meetings this week will be critical.

We expect the Bank of Japan to announce new aggressive easing measures, either in the form of negative loans to banks or perhaps steps towards direct financing of government spending, aka ‘helicopter money’.

The Federal Reserve meeting this Wednesday is equally important. No interest rate hike is expected but the accompanying statement will be key to Dollar strength over the next few weeks.

Major currencies in detail:


Last week’s sharp rally, which sent the Pound up over 2% against the Euro, could be an indication that low Sterling levels have begun to correct.

Sterling had previously been excessively punished, particularly against the Euro, on somewhat exaggerated fears of a Brexit and the associated consequences.

The rally was particularly noteworthy as the main economic news of the week, the ILO labour report, was not supportive for the Pound. The report failed to show any uptick in UK wages and unemployment stayed flat at 5.1%.

This Wednesday we get the first-quarter UK GDP growth estimate. As market consensus has already priced in a sharp slowdown from the previous quarter, any resilience in this number could be the excuse the Pound needs to continue correcting its excessively low levels.


The ECB’s April meeting came and went, with Draghi doing his best to stick to the previous meeting’s message: there remain downside risks to the Eurozone economy and the ECB is focused on implementing the measures announced in March. There was no significant mention of the Euro or currency markets.

We are seeing the first signs that political uncertainty in Spain is starting to spill over into the real economy, with the government lowering its projections for economic growth and job creation. Spanish tax revenues so far in 2016 are also coming in somewhat below expected levels.

We expect significant volatility in the Euro this week, as the Fed meeting will be followed by the release of the key inflation and growth numbers for the Eurozone as a whole.


The US Dollar had a split week. Increasing risk appetite drove most emerging market currencies higher, yet European currencies and, rather spectacularly, the Yen, continued their retreat against the Greenback.

As usual, the Federal Reserve meeting will dominate the calendar this week. Markets appear to be quite relaxed, expecting no action and a noncommittal statement.

We agree there is unlikely to be any dramatic news from the FOMC until the key June meeting. For now, the US Dollar trend will be driven by news from elsewhere as well as the evolution of risk appetite in global financial markets.


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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.