- UPDATE – Investors braced for GBP volatility
- Markets confident of ‘Remain’ vote – risk appetite weakens EUR and USD
- ECB to allow Greece access to cheap funding – Greek banks able to lower costs
- EUR GBP advances – Brits rush to buy travel money ahead of potential ‘Brexit’ vote
- EUR USD, EUR GBP Forecast – Volatility predicted on UK voting day
Despite confident markets boosting risky assets, EUR USD and EUR GBP advanced as nervous Brits bought holiday money to hedge against ‘Brexit’ losses.
Pound (GBP) Falls as Investors Brace for Volatility
Risk appetite remains on today as the UK goes to the polls, suggesting that the markets are still confident of a ‘Remain’ vote. The Euro and the US Dollar have both weakened in response. In the UK, traders are less optimistic however, with the cost of insuring against volatility in the Pound skyrocketing to at least the same levels last seen during the financial crisis.
‘Brexit’-Fearing Brits Demand Travel Money, Euro (EUR) Advances
According to the Guardian, anxious Brits ran to get their travel money yesterday, fearing a ‘Brexit’ vote and the subsequent weakening of the Pound. The paper’s Rupert Jones reported that ‘The Post Office said branch sales were up by 48.8% on the same period a year ago, while online purchases had increased by 381%’. Such high demand for the Euro helped to improve the common currency’s position towards the end of the session, despite it starting out weak due to rising appetite for high-yielding assets.
Also boosting the common currency yesterday was the news that the European Central Bank (ECB) is likely to reinstate Greece’s access to cheap funding operations in the next few days. Greek banks have been unable to access conventional ECB funding operations for more than a year after dire economic circumstances nearly saw Greece being forced from the Eurozone. Having to borrow from the Emergency Liquidity Assistance (ELA) fund at an interest rate of 100-150% has added to the problems faced by Athens. Reinstatement to cheaper ECB funds – the standard ECB borrowing rate is currently 0% – will help banks to lower their operational costs and help the struggling economy to switch to more sustainable debt.
According to Euroxx, a Greek brokerage:
‘The reinstatement of the waiver for Greek assets by the ECB could benefit Greek core banks’ net interest income by as much as around 80 million Euros – after tax at around 60 million Euros – depending on the eligibility of the Greek assets and the level of haircut imposed. This, in our view, will be essential for the reduction of Greek banks funding costs, which along with the gradual easing of capital controls should also help the all-important return of deposits into the system.’
US Dollar (USD) Weakens as IMF Cuts Economic Outlook
Poor domestic data mixed with a general lack of safe-haven demand yesterday, keeping the US Dollar firmly in negative territory. On top of this, a dovish outlook on the US economy from the annual International Monetary Fund (IMF) report further weakened the ‘Greenback’.
The report did suggest that the US economy was in good shape overall, although it highlighted the high number of people in poverty as a concern. Despite its confidence in the robustness of the US economy, however, the Fund downgraded its growth outlook, suggesting GDP of 2.2% in 2016 and 2.5% in 2017. According to the report, inflation would continue to slowly move towards the Federal Reserve’s target.
The IMF also predicted that the US Dollar would become significantly overvalued, stating in its report that:
‘At today’s level of the real effective exchange rate, the current account deficit is expected to rise above 4 percent of GDP by 2020, pointing to the US Dollar being overvalued by 10-20 percent.’
Eve of UK Referendum Keeps Pound (GBP) Weak
The latest polls put the referendum too close to call according to the UK’s leading polling experts. While the markets placed much higher odds on a ‘Remain’ vote than the polls, Pound nonetheless weakened. The final day of campaigning saw a flurry of activity, controversy and unity.
David Cameron attacked Michael Gove for comparing the ‘Remain’ campaign’s use of economists warning against a ‘Brexit’ to the Nazi propaganda used to try and discredit Albert Einstein. Iain Duncan Smith accused the Prime Minister of lying about Turkey; that the Prime Minister was a chief supporter of Turkish accession and that he was severely underplaying how soon Turkey would be joining the European Union. A memorial event was held in Trafalgar Square for politician Jo Cox, who was murdered a week ago.
EUR, USD, GBP Exchange Rate Forecast: Referendum to Dominate Currency Movement
The polls have already opened for the UK’s EU membership referendum. It is highly likely that many of the major currencies will see lacklustre trading throughout the day, with the Eurozone PMIs and US labour market data and manufacturing PMI largely ignored.
Considering the large number of surveys carried out in the weeks running up to the referendum, there is a good chance that multiple exit polls will be conducated during the course of the day. Any indication of a lean towards a ‘Leave’ vote could see the Euro and the Pound weaken, strengthening the US Dollar. Hints of a ‘Remain’ victory will likely have the opposite impact.
EUR USD, EUR GBP Conversion Rates
The Euro US Dollar (EUR USD) exchange rate was trending in the region of 1.1286 yesterday, while the Euro Pound (EUR GBP) exchange rate traded around 0.7685.