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Sterling (GBP) Fluctuates Vs. Euro (EUR) and US Dollar (USD) with #EUref Ahead

  • Pound (GBP) Exchange Rates Cool – Traders take profits
  • Euro (EUR) Rates Mixed– Corporate Bond purchases begin
  • US Dollar (USD) Static – Improved market sentiment limits demand
  • Pound Sterling Forecast to Fluctuate – UK data to provoke volatility

Pound Sterling (GBP) Exchange Rates Retreat as Traders Take Profits

The significant Sterling upsurge on Tuesday opened a number of attractive selling opportunities for traders. As a result, the Pound softened versus most of its major peers.

The Euro edged higher in early trade on Wednesday, whilst the US Dollar was trending narrowly versus a number of its rivals.

One of the reasons for the movement was the World Bank’s decision to cut both its US and global growth forecasts.

The expectation that this decision could have a negative impact on the Federal Reserve’s plans to increase interest rates kept the US Dollar under pressure, as did the news that Hillary Clinton was elected as the Democratic Presidential nominee.

Before the close of European trading, NIESR published its May GDP estimate for the UK. It provided a figure of 0.5%, up from positively revised growth of 0.4% in April. While encouraging to note that the rate of expansion didn’t slow in the face of EU referendum uncertainty, with the vote now only weeks away Sterling failed to be lifted by the result.

The Pound Sterling to Euro (GBP/EUR) exchange rate is currently trending in the region of 1.2770, whilst the Pound Sterling to US Dollar (GBP/USD) exchange rate is trending in the region of 1.4520.

(Previously updated 07/06/16 @ 16:44 GMT)

Suspected Trader Error Caused Pound Sterling (GBP) Exchange Rates to Climb

Whilst still holding a comparatively weak position following a number of EU referendum opinion polls indicating a lead for the ‘Leave’ campaign, the Pound spiked during Asian trade.

Given the lack of a catalyst and the fact that the Pound isn’t usually liquid during the Asian session, many economists’ speculate that the sudden Sterling jump was trader error, perhaps an accidental triggering of automatic orders to sell or buy assets to avoid losses.

Hong Kong-based strategist Sue Trinh wrote; ‘There was no obvious catalyst for the move and it looks stop-driven.’

Domestic data has also been supportive, preventing Sterling returning to depreciation. The impact has been minimal, however, with data taking a back-seat amid an atmosphere of growing political uncertainty and resultant market turmoil.

May’s BRC like-for-like Sales advanced by 0.5% on the year, trumping expectations of 0.3% growth. May’s Halifax House Price growth also bettered median market forecasts.

‘The strength of demand, combined with very low supply, is causing house prices to rise at a brisk pace,’ Halifax housing economist Martin Ellis said.

Given that the absence of high-impact data publications during Tuesday’s European session, there is a high chance that the Pound will hold gains versus its major rivals thanks to subdued trade.

Also adding to Sterling gains have been results from the latest set of EU referendum polls which have given ‘Remain’ the lead. This highlights just how sensitive the Pound has become to EU referendum developments. The latest polls have brought the Pound back to trade near levels seen at the close of last week.

That being said, Sterling remains around 4 cents lower than the high of 1.32 achieved in May.

Euro (EUR) Exchange Rates Edge Lower ahead of the Final Figure for Q1 Eurozone GDP

Despite significantly reduced odds of a near-term Federal Reserve cash rate increase, the Euro failed to advance versus its major peers.

Lack of demand for the single currency can be linked to ongoing ‘Brexit’ jitters. If the UK votes to leave the EU there could be a number of member states that follow suit.

Whilst the EU and Eurozone are not one in the same, they are strongly connected. The collapse of the EU could trigger the collapse of the Eurozone.

Also weighing on demand for the common currency is uncertainty regarding the European Central Bank’s (ECB) corporate bond buying programme, due to launch on Wednesday.

Jim Reid, strategist at Deutsche Bank, notes that ‘across my recent travels it’s hard to find many investors that think the ECB’s decision to purchase corporate bonds is a welcome development.’

Citi strategists warn: ‘Our chief concern with European credit is that issuance will continue to swell as demand effectively creates supply. In many ways this looks like the US credit cycle with a lag. As such we are reluctant to chase EUR IG spreads lower.’

Although the Eurozone’s growth data showed positively revised estimates for output, the Euro failed to recoup this morning’s losses against the Pound. In fact, the GBP/EUR exchange rate climbed higher still, with the pairing achieving a high of 1.2899 during the European session. This is likely to be the result of ongoing concerns regarding the ECB’s bond-purchasing programme.

US Dollar (USD) Exchange Rates Struggle against Fed Rate Hike Uncertainty

After last week’s dismal result from US Non-Farm Payrolls, demand for the US Dollar cooled significantly. This was mainly a response to reduced bets regarding the timing of a Federal Reserve cash rate hike.

‘It makes it a lot tougher for the Fed, clearly. It now puts them in an awkward position of having to justify higher rates into a slowing job market,’ said David Lafferty of Natixis Global Asset Management. ‘I don’t think history would look very favourably on that.’

The change in rhetoric during a speech from Fed Chairwoman Janet Yellen also confirmed speculation of delays to a rate hike. Yellen moved away from stating that it was now ‘appropriate’ to hike rates, stating that if certain conditions are met a rate hike is ‘likely to be appropriate’.

‘If incoming data are consistent with labour market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate. The uncertainties are sizable, and progress toward our goals and, by implication, the appropriate stance of monetary policy will depend on how these uncertainties evolve.’

Analysts at Bank of America Merrill Lynch predict a Fed rate hike in September, however, stating;

‘Low inflation and low labor force participation justify allowing the unemployment rate to undershoot its long-run level, while the asymmetric nature of policy at the lower bound also supports keeping policy accommodative. We expect the next hike at the September meeting.’

With an absence of significant domestic data, with April’s Consumer Credit report unlikely to be hugely impactful, there is a high chance that the US Dollar will hold losses versus a number of its major peers.

The Pound Sterling to Euro (GBP/EUR) exchange rate was trending within the range of 1.2713 to 1.2899 during Tuesday’s European session.

Meanwhile, the Pound Sterling to US Dollar (GBP/USD) exchange rate was trending within the range of 1.4451 to 1.4662.