Sterling and Euro rally again as calm returns following Brexit panic
30/Jun/2016 • Currency Updates•
A rebound in risk appetite helped boost the Pound and the Euro for a second day yesterday, as calm returned to the FX markets following a volatile and uncertain few days in currency trading.
After suffering its largest one-day drop on Friday, Sterling strengthened by close to 1% during London trading with concerns over a slowdown in UK economic growth and political uncertainty taking a temporary backseat. The FTSE 100 even edged higher than its pre-Brexit levels.
Brexit news appeared exhausted on Wednesday, with politicians in the UK bracing for a mass realignment in parliament before any timeline on the UK’s EU exit can be determined.
The Euro also rebounded from its three-and-a-half month lows, with traders seemingly relieved at the prospect of prolonged exit negotiations between Britain and the European Union. As long as the UK remains a member of the EU, risk assets should perform relatively well, particularly given the Federal Reserve looks set to delay its interest rate hike until December, at the very earliest.
Emerging market currencies subsequently rebounded yesterday, most notably the South African Rand, Brazilian Real and Mexican Peso, rallying in excess of 1.5% against the US Dollar. Such a sharp rebound in risk assets supports the idea that many were oversold following last week’s shock Brexit vote.
With calm tentatively returning to the markets we think economic announcements in the major economies could begin to take on more importance. Fed member James Bullard will be speaking after European markets close at 18:30 UK time and, as the first Fed speaker post-Brexit, his speech could gain greater focus than usual.
Meanwhile, the latest inflation figures in the Eurozone this morning are expected to show that prices were flat in the year to June, which could ramp further pressure on the ECB to increase stimulus measures in the coming months.
Governor of the Bank of England Mark Carney will also be speaking at 16:00 UK time and is expected to calm fears that Britain’s financial system could experience a shock following the vote to leave the EU.
Major currencies in detail:
Sterling rallied 0.9% on Wednesday, reducing its deficit with Friday night’s high to around 10%.
While the Pound was one of the best performing currencies yesterday, a number of economists have already begun calling for an interest rate cut by the Bank of England and downgrading the UK’s growth forecasts for the coming year.
Economic growth figures for the first quarter this morning will be a complete non-event, given the market’s fixation on economic conditions post-Brexit. We instead look to next Tuesday’s Financial Stability report from the Bank of England, with one eye on the central bank’s monetary policy meeting in a couple of weeks’ time.
There is potential for further declines in the Pound in the coming days should the market ramp up its expectations for a BoE interest rate cut next month.
In line with the Pound, the single currency rallied 0.5% yesterday.
European Central Bank member Constancio became the latest Governing Council member to comment following last week’s Brexit, painting a fairly dour outlook for the Eurozone economy. This follows comments from ECB President Mario Draghi that the Brexit could knock up to 0.5% off growth in the Eurozone.
Inflation figures for the Euro-area will be the focus this morning. The ECB’s meeting accounts will be dated and are unlikely to draw much attention this afternoon.
An increase in risk appetite reversed much of the recent safe-haven flows into the US Dollar yesterday, sending the currency 0.3% lower against its major peers.
Economic data out of the US yesterday suggested that the world’s largest economy could be losing momentum. Personal income growth slowed to 0.2% from 0.5% in May, while consumer spending also lost pace, falling to 0.4% from 1.1%.
Fed fund futures are now not pricing in the next Fed interest rate hike until 2018, with just a 40% chance that rates will go up next year. However, as we have seen in the last few months, future rates can change very quickly and we would expect a December hike to be back on the table before long, providing the markets continue to stabilise.
Investors in the US will look to this afternoon’s jobless claims figures and speech from Fed member Bullard. The next major event in the US, other than central bank speakers, will be next Friday’s labour report.
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