Higher Dollar, Euro and Sterling volatility levels may recommence this week
31/May/2016 • Currency Updates•
We mentioned that last week would likely be the calm before the June storm. Indeed, it was a fairly uneventful week in terms of data releases, significant news and currency movements. All major currencies ended the week up within 1%, which is rare.
We saw Sterling continue to rebound from multi-year lows against the Euro and the US Dollar after poll results showed a clear lead for the ‘in’ campaign.
The first few of a string of critical data releases are scheduled for this week. The US labour report on Friday will, in our view, go a long way in determining whether the Federal Reserve will or won’t hike interest rates in June. It is possible that a number that is merely in line with expectations should suffice to greenlight the second rate increase in the US since 2006.
Another key market event this week is the European Central Bank meeting on Thursday. We expect a carefully choreographed performance that won’t give us much information.
Despite the picture beginning to crystallise, our client base continues to cover its Sterling exposure, both long and short, well in advance of the Brexit referendum.
Of note last week was also that Swiss corporates were taking advantage of the strong levels in many currencies to buy.
Major currencies in detail:
With little in the way of economic news or policy announcements, Sterling once again traded in reaction to new referendum polls.
The news was reassuring and the chances of a Brexit result appear to have dropped firmly below 20%. Unsurprisingly, the Pound traded well all week and rallied against most of its major peers.
There’s a lull in critical information this week. We are focused on Governor of the Bank of England Carney’s speech on Thursday and the key PMI business sentiment indicators out on Thursday and Friday. We expect to see some early positive impact from the latest polls in business confidence.
We had a small but nevertheless worrisome drop in the key PMI composite business sentiment indicator in the Eurozone last week. Given the massive amount of monetary stimulus that has been thrown to the Eurozone economy, we would have expected it to move in the opposite direction.
This news, together with the previous week’s inflation releases, can’t be welcome for the ECB and the Governing Council’s meeting this week. However, we expect little action or communication to markets as the ECB wants to give its measures more time to work.
However, unless we see a sustained pick-up in inflation and the PMI indices, we expect the possibility of further stimulus to dominate the Eurozone economic news cycle over the remainder of the summer.
The positive tone from recent macroeconomic news and steadily hawkish comments from Federal Open Market Committee members has fuelled a US Dollar rally and rattled the interest rate markets.
A June Fed interest rate hike remains ‘data-dependent’ on the May labour report out on Friday. The numbers will probably be depressed by the significant Verizon strike, to the tune of 40,000. Excluding this one-time effect, we expect to see another number around the 200,000 mark.
This would clear the way for a Fed hike later in the month and continue to lend good support to the US Dollar.
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