Sterling soars again on growing support for ‘remain’ vote
25/May/2016 • Currency Updates•
The Pound rallied sharply across the board on Tuesday, buoyed by growing expectations that the UK will vote to remain part of the European Union next month. Betting odds suggest just a 20% chance of a Brexit in June following a raft of opinion polls and warnings from senior officials on the negative effects of a vote to leave.
Governor of the Bank of England Mark Carney launched a staunch defence of his stance on the EU referendum debate yesterday. Speaking to lawmakers at the inflation report hearings, Carney said it was not clear whether the central bank would cut rates in the event of a Brexit, although claimed that leaving the EU would lower the possibility that the next rate move would be up.
Meanwhile, expectations for the timing of the next US interest rate hike by the Federal Reserve have continued to be brought forward. This has provided good support for the US Dollar, which rallied to its strongest position against its major peers in almost two months on Tuesday.
Businesses have begun earmarking the Fed’s next meeting in June as a realistic opportunity for the central bank to raise rates again after their historic hike in December.
Financial markets are now pricing in around a 40% chance that US rates will be ramped up again in June, the highest it’s been since mid-March, and a 58% probability of higher rates by the July meeting. This was increased further yesterday by some very strong housing data, showing home sales had soared to an eight-year high last month.
The Bank of Canada will be meeting today, although they are not expected to announce any changes to monetary policy. Other than that, today will be fairly light in terms of economic data, with investors focusing their attention on growth figures in the US and UK later in the week.
Major currencies in detail:
Sterling rallied 1% against the US Dollar and a massive 1.6% versus the Euro on Tuesday, buoyed by growing support for the UK to remain in the EU.
The topic of a Brexit dominated yesterday’s inflation report hearings. New monetary policy committee member Vlighe claimed that the slowdown in the UK economy in the past few months was ‘more likely than not’ due to the referendum, although he claimed that spending would increase should the UK vote to remain in.
In another stark warning, Carney claimed that the UK’s export sector would likely shrink in the event of a Brexit, given that 60% of overall UK exports are currently to the EU.
With no economic indicator data out of the UK economy today, attention will remain firmly fixed on the latest Brexit polls.
The Euro fell 0.5% against the US Dollar to its weakest position since mid-March on Tuesday. A dismal performance since the beginning of May has seen the currency fall 4% in less than three weeks.
The single currency received little help yesterday from the latest ZEW economic sentiment surveys, which disappointed again in May. The Euro-wide index fell to 16.8 from 21.5, with optimism among European businesses dwindling amid concerns of a Brexit next month.
ECB Vice President Vitor Constancio spoke in Frankfurt yesterday, claiming it was too early to consider additional stimulus measures in the Eurozone.
The monthly IFO business expectation indices and another speech from Vitor Constancio this morning could cause some Euro volatility.
Growing expectations for a Fed interest rate hike at either the June or July Federal Open Market Committee meetings sent the US Dollar 0.3% higher yesterday.
The chances of a June hike were given another boost by a very strong set of new home sales figures yesterday. Sales soared by an unprecedented 16.6% in the month to April, a total of 619,000. This marks the highest increase in the measure in eight years, a further sign that the US economy is performing well enough to warrant higher rates.
The services PMI from Markit at 14:45 UK time will likely be the biggest data point out of the US today.
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