Brexit fears and aggressive ECB send Dollar soaring, slam Sterling

Enrique Díaz-Álvarez13/Jun/2016Currency Updates

With just ten days to go until Britain decides on the country’s EU membership, Brexit polls are overshadowing macroeconomic data and other news. Last week polls showed an apparent swing towards ‘leave’, which sent Sterling and other perceived risk assets sharply lower.

The Euro/Dollar exchange rate is directly affected by the referendum as well. Our analysis shows that referendum polls move the Euro against the US Dollar by about 20% of the Sterling move.

The Euro suffered a sharp decline on Thursday when the ECB confirmed it was more aggressively purchasing European corporate debt.

Businesses should expect event risk in the financial markets to pick up as we’re entering the second half of June, with a string of major central bank decisions lined up alongside Brexit polls and the referendum itself. This will contribute to the high volatility levels we’ve seen in the markets recently and businesses should ensure they manage their currency risk accordingly. We’ve observed an increasing two-way flow in Euro/Dollar, as both buyers and sellers rush to hedge their exposure before the EU referendum.

While we, in line with the markets, don’t expect the Federal Reserve to hike interest rates at its meeting this week, the tone of the Federal Open Market Committee communications will be in focus.

The Bank of England meets on Thursday and we expect that the central bank will reiterate that a Brexit poses the biggest economic risk in the UK.

The Bank of Japan will announce its monetary policy decision this month. We disagree with the consensus view that the BoJ will stand pat and expect the central bank to announce further easing measures.

While we don’t expect any surprises from the Swiss National Bank, its June meeting may have an impact on the Swiss Franc.

In other currency news, we’ve seen that the South African Rand’s relative resilience has brought some buyers out of the woodwork.

Major currencies in detail:


Usually, surprisingly strong April industrial production numbers would have been a mild positive for the Pound. However, nothing will matter for the next few weeks except the results of the EU referendum.

The publication of polls putting the ‘leave’ campaign ahead savaged Sterling last week. It’s worth noting, however, that bookmakers still attach a less than 1/3 probability of a ‘leave’ outcome and our favorite indicator, the Number Cruncher aggregator of polls, puts the likelihood of a Brexit at just under 25%, even after last week’s polls.

This week we’ll see an interview with ’leave’ supporter Michael Gove on Wednesday, so close attention will be paid to any poll published in the following two days.


Last Thursday the ECB announcement that it’s buying more lower-rated corporate debt than most had been expecting, placed additional downward pressure on the Euro. The currency has also been under pressure from recent Brexit referendum polls.

ECB purchases of lower-rated credits such as Volkswagen and Telecom Italia bonds mean that President Mario Draghi is still operating a ‘whatever-it-takes’ mode.

The Eurozone’s macroeconomic and monetary calendars next week are both very light. We expect the Euro to be far more influenced by the referendum polls in the UK and, crucially, the Fed meeting on Wednesday.


After rallying last week on the back of safe-haven flows, the US Dollar faces a critical test at the June Fed meeting on Wednesday.

With the Fed all but certain to stand pat on interest rates, we expect it to reiterate that all subsequent meetings are ‘live’ possibilities for a hike. We also expect the famous ‘dot plot’ summarising members’ expectation of future policy moves to remain largely unchanged from the March meeting.

Finally, we think there will be a noncommittal assessment of the state of the US economy, noting equally the slowdown in the latest jobs report and the generally positive tone of other macroeconomic data. This will allow the Fed to to keep its options open on whether to hike rates, or not, in July and wait for the critical June payroll report.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.