- Euro (EUR) Exchange Rates Struggled Last Week – German 10-year bunds turned negative for the first time
- Sterling (GBP) Exchange Rates Fluctuated – Traders continued to be highly reactionary to EU referendum developments
- EU Referendum Vote to Dominate Trader Focus – Sterling forecast to cede ground amid uncertainty
- Domestic Data to Have Minimal Impact – Euro exchange rates also predicted to struggle against ‘Brexit’ uncertainty
Such will be the impact of the EU referendum result on both the Euro and the Pound it is difficult to forecast exchange rate movement.
The EUR/GBP conversion rate will be subject to significant volatility in the run up to the vote, with the result of a ‘Brexit’ likely to have the greatest impact on GBP and EUR.
Euro (EUR) Exchange Rates: Will Bonds Continue to Suffer Amid EU Referendum Uncertainty?
One of the most significant headwinds weighing on demand for the common currency last week was increasingly low yields from several developed nations’ corporate bonds.
Yields from German 10-year bunds turned negative for the first time, as did yields from Swiss 30-year bonds.
Given that the European Central Bank (ECB) has outlined an aggressive programme of asset purchases, the falling bond yields have been a major problem.
Part of the reason for lower yielding bonds can be linked to growing uncertainty regarding the UK’s EU referendum.
‘The fact that Brexit is now perceived as a possibility is a total game-changer, and it’s very difficult to estimate the macroeconomic impact,’ said Franck Dixmier of Allianz Global Investors.
Also having a major impact is increasingly dampened optimism that the ECB will be able to stimulate an economic recovery, especially with the effectiveness of negative rates being called in to question.
As we look ahead to the coming week there is a high chance that domestic data will have diminished impact with trader focus dominated by the EU referendum.
Many analysts predict that the Euro will be hardest hit from the fallout of a Brexit vote in the long term, with the UK’s exit predicted to be the catalyst for other member states to have referendums of their own.
‘There’s rising populism in Europe in general, and the UK referendum could open a door,’ Mr. Dixmier said. ‘A taboo has been broken, whatever the outcome of the vote, and there could be referendums in other European countries. Markets and investors will have to live with that.’
With all that said, Tuesday’s German ZEW Economic Sentiment Survey for June has the potential to cause EUR exchange rate volatility, and will be of interest to traders even if it has a muted impact on exchange rate movement.
Pound Sterling (GBP) Exchange Rates: EU Referendum to Dominate Market Focus
Much like its neighbour, the British Pound is unlikely to see much response from domestic data results this week with all eyes looking ahead to Thursday’s EU referendum vote.
Last week, implied Sterling volatility reached record-highs amid growing uncertainty as traders became increasingly reactionary to opinion polls.
Volatility cooled towards the close of the week, however, after referendum campaigns were suspended in light of the horrific murder of British lawmaker, Jo Cox.
As we look ahead to the coming week it will be increasingly difficult to predict Sterling movement, with domestic data unlikely to provoke volatility.
One of the most significant ecostats, however, will be the Bank of England’s (BOE) second Indexed Long-Term Repo operation. This is a way for the central bank to ensure banks have enough cash to withstand the potential impact of a Brexit.
Traders are likely to be highly reactional to any EU referendum developments, especially if polls suggest that the UK will vote to leave.
‘Forex markets hate uncertainty and this nowhere better depicted than in the huge volatility there has been in the value of sterling over the last few weeks. The uncertainty surrounding the June 23rd EU Referendum has caused some big swings with GBPJPY topping the list closely followed by GBPNZD,’ stated economist Stuart Cowell.
Last week, the EUR/GBP exchange rate was trading within the range of 0.7942 to 0.7986.