- UPDATE – EUR USD advances on market confidence of a UK ‘Remain’ vote
- EUR USD, EUR GBP exchange rates slide despite OMT support – German court rejects challenge to Overt Monetary Transfers
- Draghi parrots need for reforms – ECB chief warns of ‘Brexit’ impact
- USD trends bullishly – Yellen comments have little impact
- UK referendum in focus – Data unlikely to move exchange rates
Euro (EUR) Strengthens on Market Belief UK Voters will Reject ‘Brexit’
The latest opinion surveys may have polling experts claiming the referendum outcome will be too close to call, but the markets seem much more confident. An initial move towards higher-yield assets weakened the Euro and the US Dollar, but optimism has now extended even to the common currency. There are still polls left to come, however, which could threaten the Euro advance.
Top German Court Backs ECB Crisis Tool, Yet Euro (EUR) Slides
EUR USD, EUR GBP exchange rates were on the downtrend yesterday thanks to resurgent risk-appetite in the wake of falling ‘Brexit’ fears. This led to traders deserting the Euro in favour of higher-risk assets, although its close association with areas potentially under threat from a ‘Brexit’ impact has left the single unit unappealing even during times of safe-haven demand.
The Pound, meanwhile, was riding high amid increased demand for the British currency in light of growing support for the ‘Remain’ campaign. A statement from popular footballer David Beckham was one of the factors upping the odds of Britain voting to remain part of the EU. With Beckham being such an influential figure, his support for keeping the EU together was viewed as being likely to sway a number of undecided voters.
Tension in the Eurozone eased slightly after the German Constitutional Court rejected a legal challenge directed that the European Central Bank’s (ECB) Overt Monetary Transfer (OMT) mechanism. While never used and intended only for times of crisis, the OMT had come under fire from German lawmakers, who claimed it constituted illegal monetary financing under the German constitution. If upheld, the challenge could have limited the ECB’s powers to react to another financial crisis.
ECB President Mario Draghi gave a speech in which he said that recovery in the Eurozone had gained momentum, although he warned that:
‘Uncertainty remains high and downside risks are still significant due to the continued fragile state of the global economy and geopolitical developments.
We will closely monitor the evolution of the outlook for price stability. We stand ready to act by using all the instruments available within our mandate, if necessary, to achieve our objective. In particular, the ECB is ready for all contingencies following the UK’s EU referendum.’
US Dollar Strong despite Cautious Yellen Comments on US Economy
Federal Reserve Chair Janet Yellen testified before lawmakers yesterday, yet the US Dollar largely failed to react to her comments. Yellen even referenced the ‘Brexit’ referendum, stating:
‘In the current environment of sluggish growth, low inflation, and already very accommodative monetary policy in many advanced economies, investor perceptions of and appetite for risk can change abruptly. One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A UK vote to exit the European Union could have significant economic repercussions.’
Previously, US policymakers had been largely dismissive of the impact of a ‘Brexit’ upon the US economy. The recent fall in the US Dollar shows how investors have begun to realise the potential for adverse impact in the States. Yesterday, despite safe-haven demand driving up the more risky assets, the ‘Greenback’ was able to recover thanks to dwindling ‘Brexit’ fears.
Pound Advances as Markets Grow Increasingly Confident of ‘Remain’ Vote
The Pound advanced yesterday, making bullish gains on the Euro, although towards the end of the session it slipped into negative territory verses the US Dollar. While two polls gave contradictory results, with one indicating a ‘Remain’ victory and one suggesting ‘Leave’ would triumph, investors were in a buoyant mood. Even dire warnings from two leading experts – Nouriel Roubini and George Soros – regarding the future of the UK economy and the Pound in the event of a ‘Brexit’ weren’t enough to dampen investor spirits.
Part of the bullish mood was thanks to the fact that UK banks largely ignored the Bank of England’s (BoE) liquidity auction, with take-up at its lowest since the beginning of 2015. The fact that banks took just £370 million in liquid assets suggested that the City was confident in a vote to ‘Remain’, or at the very least that the UK’s financial institutions believed they were well equipped enough to deal with market volatility in the event of an ‘Out’ vote.
EUR USD, EUR GBP Exchange Rate Forecast: Data likely Superfluous on Eve of ‘Brexit’
There is no tier-one data due for release today from either the Eurozone, the US or the UK. However, with the UK going to the polls tomorrow, it is likely that investors won’t be focussing on anything but the vote, rendering data obsolete for the time being.
Should the final day of campaigning remarkably prove to be a quiet affair, the Euro could weaken in response to consumer confidence data, which is expected to remain around the same negative level as previously. The US Dollar could be driven by the continuing testimonial of Janet Yellen before lawmakers, although considering the Fed Chair warned of the impact of a ‘Brexit’, it seems unlikely her comments would steal focus.
There is no UK data set for release today, a fact the markets are likely to overlook with polling day just around the corner.
The Euro to US Dollar exchange rate trended around 1.1274 while the Euro to Pound exchange rate traded in the region of 0.7676 during yesterday’s European session, where EUR USD, EUR GBP exchange rates go next largely depends on the latest EU referendum news.