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‘Brexit’ Bets and BoE Criticism Drive Pound Euro, US Dollar Exchange Rate Forecasts in 2016, Fed Holds Rates

  • Update – UK unemployment rate drops, wage growth strong
  • Update – Eurozone trade balance widens, EUR remains weak
  • ‘Brexit’ Polls Crash Pound – majority show 7% lead for ‘Leave’ vote
  • Stagnant UK Inflation Surprisingly Boosts Pound – Trader relief figures weren’t worse
  • Greek Central Bank Chief Warns Against Debt Targets – Calls creditor demands ‘socially unjust’
  • USD Bullish on Safe-Haven Demand – Referendum fears cause global risk-aversion

BoE Highlights ‘Brexit’ Risks, Pound Gains on Peers

The Pound Euro exchange rate rallied as the European session continued on Thursday and investors digested the minutes from the BoE’s latest interest rate decision.

Bloomberg stated: ‘Policy makers also added a new dimension to their caution, highlighting the international threats stemming from the vote. With polls showing the “Leave” campaign is ahead, central banks around the world are on high alert, with the chiefs of the US Federal Reserve, the Bank of Japan, the Bank of Canada and the Swiss National Bank all citing the vote as being potentially disruptive.’

The Pound held these gains as EU referendum campaigning was suspended ahead following the tragic murder of MP Jo Cox. The shocking event sent shockwaves through not only the Labour party, to which the MP belonged, but across the whole country.

(Previously updated 08:00 16/06/2016)

Fear that the UK looks increasingly likely to leave the European Union has dominated GBP/EUR and GBP/USD exchange rates of late but the latest movement in the pairings has been caused by the Federal Open Market Committee’s latest interest rate decision.

With the Fed leaving rates on hold, the US Dollar fell across the board, boosting the Euro in the process.

Strategist Peter Kenny noted: ‘It’s difficult to imagine them getting less aggressive than they are currently. Given the global headwinds, the lowered projections for global growth by the IMF and most governmental organizations that really speak to the global economic health, there is no question that is manifest in the downsizing of expectations.’

While the Pound Euro pair fell back to 1.25, shedding the earlier gains accrued as a result of the UK’s jobs data, the Pound US Dollar exchange rate firmed to 1.4177.

With the UK’s retail sales figures and the Bank of England (BoE) rate decision ahead, both the GBP/EUR and GBP/USD exchange rates are likely to experience further volatility. ‘Leave’ campaigners have already begun attacking the BoE on the expectation that the Bank will comment upon the impact of a ‘Brexit’ in its latest minutes.

Pound Euro Climbs on UK Employment Data

The Pound Euro exchange rate extended earlier gains during the European session as the UK’s employment figures surprised to the upside.

Average weekly earnings including bonuses held at 2.0% rather than falling to 1.7% as forecast while weekly earnings excluding bonuses improved from 2.2% to 2.3%.

The UK unemployment rate also dropped to 5.0% from 5.1%.

GBP/EUR advanced to a high of 1.2670 after the data was published, with GBP/USD also firming.

However, the Pound softened slightly on growing news of a Tory revolt after George Osborne published his post-‘Brexit’ economic plan, which included tax hikes and further austerity measures to plug what the Chancellor predicted would be a -£30 billion ‘black hole’ in public finances. By the end of trading, 63 Tory MPs had signed a letter saying that they would vote against the measures in Parliament.

Whether or not the GBP/USD exchange rate is able to strengthen further largely depends on the tone adopted by the Federal Open Market Committee (FOMC) after today’s policy gathering.

If the Fed maintains a cautious outlook on interest rates ahead of the UK’s EU referendum the US Dollar could be pressured lower against its major peers.

(Previously updated 12:20 15/06/2016)

Euro Remains Bearish Despite Widening Eurozone Trade Balance

Eurozone trade balance figures have posted a strong surplus in April, defying predictions of a small narrowing. On a seasonally-adjusted basis, the trade surplus rose from €22.3 to €28 billion Euros. The Euro has remained weak following the announcement, however.

(Previously updated 15/06/2016)

The UK’s EU membership referendum caused chaos on the global markets yesterday, with GBP/USD and GBP/EUR exchange rates trading with volatility throughout the London session.

With investors so focused on the in-out EU referendum vote, the impact of domestic data has been rather muted, but the upcoming UK employment report could have an impact on Pound Euro and US Dollar exchange rates in the hours ahead.

Pound (GBP) Rocked by Heightened ‘Brexit’ Fears and Inflation Data

Another series of referendum polls caused the Pound (GBP) to plummet yesterday after the majority showed a 7-point lead for the campaign to leave the European Union. The FTSE 100 and European stock indexes dropped to three-month lows, while GBP/EUR hit its second-lowest level in nine weeks and GBP/USD its lowest for over two months. Sterling volatility hit a fresh high around a level not seen since the collapse of the Lehman Brothers’ at the start of the global financial crisis.

The Pound was able to recover some of its losses against the Euro and even break into positive territory towards the end of the London session thanks to the UK’s consumer price data. While data failed to meet the median market forecasts of a slight rise, showing instead that inflation had remained steady, markets were relieved that referendum uncertainty hadn’t caused price growth to slow. This helped the battered Pound to rally, although it remained deep in negative territory against the bullish US Dollar.

According to the Guardian’s Economics Editor, Larry Elliott:

‘For the Bank of England, lower-than-expected inflation is a double bonus. On the one hand, it increases the spending power of households and so boosts growth. On the other, it provides greater wriggle room before the government’s 2% inflation target comes under serious threat. With the referendum making the outlook so uncertain, the extra leeway will be extremely welcome in Threadneedle Street.’

Euro (EUR) Weakens as ‘Brexit’ Fears Undermine Safe-Haven Demand

Bearish market sentiment boosted safe-haven assets, but the Euro’s close ties with the source of trader uncertainty saw the common currency slump yesterday. German 10-year bond yields dropped into negative territory for the first time on record, showing that prices has risen to new highs as desperate investors turned toward safer assets.

Comments from the chief of the Greek central bank further weakened the Euro after he called the budget surplus targets imposed upon Greece by its creditors ‘unrealistic and socially unattainable’. Yannis Stournaras called for a new deal with its creditors, claiming lower surplus targets would allow ‘a more balanced economic policy mix with emphasis on the reduction of taxation, encouraging private investment and contributing to sustainable growth rates.

According to risk consultancy Eurasia Group’s Mujtaba Rahman, ‘if these targets are missed it means more austerity and more political instability. The Bank of Greece is trying to draw attention to this. The willingness and ability of Greeks to pay these additional taxes will be limited. Austerity is reaching breaking point in Greece.

Safe-Haven Demand Pushes US Dollar (USD) into Bullish Uptrend

Yesterday’s atmosphere of risk-aversion saw the US Dollar making bullish gains against the majors. Safe-haven demand saw global stocks, commodities and high-yield currencies fall.

The day’s data also provided a boost for the US Dollar after the advance retail sales figures for May printed better-than-expected. After a 1.3% rise the previous month, forecasts were for a slowdown in growth to 0.3%, but in the end the final result clocked in at 0.5%. The result was by no means enough to raise hopes of a rate hike from the Federal Reserve, with market odds of monetary policy action at Thursday’s meeting languishing below 2%.

Part of the reason the latest data has not changed Fed hike bets is that the concerns of a ‘Brexit’ are much higher than previously. Several hawkish Fed officials had commented that the UK’s EU referendum would not negatively impact the US economy. However, this was during a period when the ‘Remain’ campaign held the lead over the ‘Leave’ camp, with the markets fairly confident that the UK would choose to maintain its status as a member of the European Union. With the markets now more inclined to expect a vote to split, the Fed is more likely to find its hands tied.

Pound Euro, US Dollar Exchange Rate Forecast: Fed Interest Rate Decision and UK Referendum to Dominate Sentiment

Tomorrow’s UK labour market data could move Pound Sterling, although it is likely that developments surrounding the EU referendum will continue to steal focus.

There is little impactful Eurozone data due out tomorrow, with the Euro likely to be moved by trader concerns over the ‘Brexit’ referendum.

While markets believe tomorrow’s Federal Open Market Committee (FOMC) decision will be for no change to monetary policy, significant US Dollar movement could be generated by the subsequent press conference from Fed Chair Janet Yellen. Should Yellen provide any hints on a near term rate hike, the US Dollar could see a bullish rise in response.

GBP, EUR, USD Conversion Rates

The Pound Euro (GBP/EUR) exchange rate was trending in the region of 1.2601 towards the end of yesterday’s European session, while the Pound US Dollar (GBP/USD) exchange rate traded in the region of 1.4134.