Sterling races to three-and-a-half-month high on lessening Brexit chances
26/May/2016 • Currency Updates•
Sterling continued to power ahead on Wednesday, boosted yet again by dwindling expectations that Britain will vote to leave the European Union next month.
Ratings agency Standard & Poor’s warned yesterday that a Brexit could jeopardise the Pound’s position as a reserve currency and the UK’s ‘AAA’ credit rating.
Bookmakers’ odds have continued to widen, with some now placing a seemingly unassailable 88% implied probability that the UK will remain within the EU.
This has sent Sterling to its strongest position against the Euro since early February. We expect this trend to continue throughout the rest of the year should the ‘remain’ vote prevail at next month’s referendum.
Meanwhile, the US Dollar remained around its highest level in 10 weeks against the Euro, with investors continuing to price in the next interest rate hike by the Federal Reserve by the central bank’s July meeting.
June has been positioned as one of the most important months in the currency markets in a very long time. Both the EU referendum and the prospect of a further rate hike in the US have been the cause of much of the volatility we’ve recently seen in the financial markets. With volatility expected to remain high, we see many businesses assessing and adjusting their currency risk management strategies. Depending on their exposure, many are locking in exchange rates for currency pairs that include the Pound, Dollar and Euro.
In other news, the Bank of Canada held its benchmark interest rate steady at 0.5% on Wednesday. The central bank warned that economic growth would fall short of expectations in the second quarter, largely due to the wildfires in the oil-rich province of Alberta earlier in the month. We see the Canadian Dollar weakening during the remainder of the year, given the likelihood that interest rates will be lowered in Canada at some point in the coming months.
Economic announcements should begin to pick up again today, starting with revised growth figures in the UK this morning. US durable goods orders this afternoon could provide yet another incentive for the Fed to hike in the next couple of months. The market expectation is for a modest bounce-back in orders, which could provide decent support for the US Dollar today.
Major currencies in detail:
Sterling continued its impressive performance on Wednesday, buoyed by reduced support for a Brexit at next month’s referendum. The Pound rose by 0.5% against the US Dollar.
The Institute of Fiscal Studies became the latest external body to chip into the Brexit debate on Wednesday, claiming that the UK could face an extra two years of austerity measures should it vote to leave. The IFS also claimed that a vote to leave could result in a £20-40 billion hit to the UK’s public finances in 2019/20.
With the outcome of the referendum looking increasingly likely to yield an ‘in’ result, implied volatility in the Pound has fallen, with six-month volatility now at its lowest level since early February.
First quarter growth this morning is expected to remain unrevised at 0.4%, although any surprises would likely move Sterling today.
Despite some impressive business sentiment data in the Eurozone, the Euro traded within a narrow band yesterday. The single currency ended the London session 0.1% higher against the US Dollar.
Consumer and business confidence in Germany both surprised on the upside on Wednesday. The monthly sentiment indices from IFO all rose. The business climate index increased to 107.7 from 106.7, while the expectations index increased sharply to 106.6 from 100.5.
However, with economic announcements light in the Eurozone at present and the ECB unlikely to increase its stimulus measures in the near term, the Euro continues to be largely driven by expectations for the next US interest rate hike.
The US Dollar index fell by 0.1% on Wednesday following disappointing US economic data.
Yesterday’s services PMI didn’t bode well for second quarter US economic growth. The latest PMI from Markit fell to 51.2 from 52.8, its weakest level in three months. US economic growth slowed to just 0.5% in the first three months of the year and was one of the key drivers behind the Fed’s decision to hold off hiking interest rates following December’s rate increase.
Also of concern, the US trade deficit widened further in April, albeit slightly less than forecast to $58 billion from $57 billion.
Durable goods orders at 13:30 will be the highlight today, with any upward surprise likely to provide further support for a June Fed hike.
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