Sterling soars by most in three weeks on receding Brexit support
19/May/2016 • Currency Updates•
The Pound jumped by over 1% against both the US Dollar and the Euro on Wednesday as support to remain a member of the European Union at next month’s referendum continues to grow.
A poll released on Wednesday afternoon by survey company Ipsos showed a massive 18 percentage point lead for the vote to remain, the clearest sign yet that Britain will likely vote in favour of staying inside the bloc on 23 June. This followed an earlier poll by YouGov which showed a similar, albeit more slender, lead for the pro-EU camp.
Betting odds for a Brexit, seen by economists as a good barometer of the chances of an EU exit, have receded fairly sharply in the past week or so, yesterday falling to as low as 25%.
This provided a significant boost to Sterling, which soared by the most in three weeks against both the US Dollar and Euro, and this morning to its strongest position against the single currency in well over three months.
Sterling traders almost completely overlooked a fairly disappointing labour report in the UK, which provided further evidence that the Bank of England is unlikely to begin its long-awaited tightening cycle any time soon.
On a particularly busy day in the foreign exchange market, the Federal Reserve also released the minutes from its latest monetary policy meeting. The minutes of the Fed April meeting were in line with our expectations, and considerably more hawkish than the market had been pricing in. This sent the US Dollar considerably higher across the board.
The main event in the currency markets today will likely be the release of the European Central Bank’s monetary policy meeting accounts this afternoon. However, with attention firmly fixed on the timing of Fed hikes and possibility of a Brexit, rhetoric from the ECB could take a backseat today.
Major currencies in detail:
Sterling soared by 1.1% against the US Dollar and by a massive 1.5% versus the Euro following yesterday afternoon’s poll results.
Retail sales figures this morning also caused another sharp rally in the Pound, having comfortably exceeded expectations at 4.3% in the year to April.
By contrast, Wednesday’s labour report in the UK was fairly mixed. Unemployment fell in real terms, although the rate remained unchanged at a healthy 5.1%. Earnings including bonuses also accelerated. However, excluding bonuses, wage growth slowed to 2.1% from 2.2%.
Attention in the UK will remain firmly on the possibility of a Brexit in the coming weeks, with investors becoming seemingly more sensitive to the polls as the referendum approaches.
The Euro ended 0.4% lower against the US Dollar following the hawkish FOMC minutes. Headline inflation in the Eurozone economy remained unrevised yesterday, with consumer price growth confirmed at a dismal -0.2% in the year to April.
Worryingly, the level of core inflation fell on a month previous to just 0.7%, its weakest yearly growth since early 2015.
A complete lack of inflationary pressure in the single currency bloc remains the single-biggest issue to the ECB. We see a good chance that the ECB could expand its stimulus measures further in the coming months should inflation fail to pick up from current levels.
The ECB’s minutes will be the highlight in the Eurozone today. Construction output data this morning will be worth noting, although is unlikely to rock the boat.
The US Dollar index rose by 0.5% following the release of last night’s Fed minutes.
Most Fed officials saw a June hike as ‘likely’ if the economy warranted, and some went as far as explicitly warning that market expectations for a June hike were ‘too low’.
We see these minutes as strong confirmation that two or three more hikes in 2016 are very much a possibility as long as the US labour market continues to hold up well. This should, in turn, lead to a long-term strengthening of the US Dollar against almost every major currency.
Focus in the US economy today will remain heavily on expectations for the next interest rate hike by the Fed. FOMC member William Dudley will be speaking at 15:30 UK time today, with any additional hawkish comments likely to provide further support for the US Dollar.
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