Sterling spikes after Brexit poll, Fed comments boost US Dollar
24/May/2016 • Currency Updates•
Sterling rose sharply as markets opened this morning, boosted by another referendum poll that showed a clear lead for the ‘remain’ camp. The latest poll from ORB showed a significant 13 point advantage for the vote to remain.
On Monday, Sterling gave up some of last week’s gains against both the US Dollar and Euro, with comments from both Prime Minister David Cameron and Chancellor George Osborne concerning investors who worry about the potential negative impact of a Brexit at next month’s referendum.
Osborne warned an EU exit would tip the UK into a year-long recession, which could include up to 820,000 jobs lost within the next two years. A worst case economic forecast from the Treasury also warned that a Brexit could lead to a ‘severe shock’, sending the Pound 15% lower in the next 24 months.
The possibility of a Brexit remains the biggest event risk to Sterling traders and looms ever larger on the horizon for UK businesses. This is all despite the recent polls which show dwindling support for the vote to leave.
Economic data out of the Eurozone on Monday was, on the whole, fairly disappointing, sending the single currency lower against the US Dollar. The manufacturing sector of the Euro-area slowed unexpectedly in May, according to Markit, despite a welcome rebound in German production last month.
Meanwhile, Federal Reserve officials continue to bring forward expectations for the next interest rate hike in the US. Federal Open Market Committee member John Williams reiterated that the ‘essentially zero’ chance of a June hike being priced in by the market a matter of weeks ago was inconsistent with the Fed’s view.
‘The combination of an increasing likelihood of additional rate hikes in the US and disappointing economic data in the Eurozone has prompted EUR/USD to return back to the trend we had been forecasting for 2016,’ says Ebury Chief Risk Officer Enrique Diaz-Alvarez.
Revised first quarter growth in both the UK and US later in the week will likely be the focus for investors in the coming days with no significant central bank releases in the calendar. In the meantime, the Treasury select committee will be meeting this morning, including appearances from Bank of England members Carney, Broadbent, Weale and Vlighe.
Major currencies in detail:
The Pound rallied sharply this morning, appreciating by 0.35% versus the US Dollar and 0.7% against the Euro following the latest Brexit poll.
Yesterday’s warning from the Treasury painted a fairly bleak picture of the outcome of a Brexit. The Treasury warned that GDP could shrink by anywhere between 3.6% to 6%, while inflation could overshoot its target to as high as 2.7% in the next two years.
They also warned that the unemployment rate could soar by 2.4%, while real wages would decline by between 3-4%.
Public sector borrowing this morning is expected to show a modest increase.
A relatively underwhelming set of PMIs yesterday sent the Euro 0.2% lower on Monday.
Concerns regarding an economic slowdown in Europe continue to be one of the main drivers behind monetary policy decision-making by the European Central Bank.
Last month’s manufacturing PMI fell to a three-month low of 51.5 from 51.7, with soft international trade flows leading to the smallest rise in new export orders in 16 months.
By contrast, consumer confidence actually increased this month. The latest index from the European Commission rose to -7 from -9.3, its highest level in four months.
The monthly confidence indexes from ZEW this morning will be the main highlight today. A speech from ECB member Peter Praet could also draw some attention.
The US Dollar index increased by 0.15% yesterday following more hawkish comments from a Federal Reserve member.
Yesterday Fed member John Williams joined the growing list of FOMC members calling for multiple rate hikes in the US, insisting that the June meeting remains live.
The poor economic growth experienced so far in the US this year has, up until now, been the main preventing factor for the next rate hike. Manufacturing in the US economy slowed in May, with the PMI from Markit declining to 50.5 from 50.8. A relatively strong US Dollar and weak demand from abroad continue to weigh on exports in the world’s largest economy.
New home sales this afternoon are expected to have accelerated in April, although will unlikely be a major market mover. Revised GDP and durable goods orders later in the week will be key in the coming days.
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