Sterling
It was a quiet day on the currency markets yesterday as investors paused for thought following last week’s strong Sterling gains.
The Pound appreciated versus most of the majors last week in response to a slew of opinion polls giving the remain camp a significant lead in the run-up to next month’s EU referendum. Yesterday British bookmaker William Hill shortened its odds on the UK remaining in the EU to 1⁄6, implying an 85% chance that Britons will vote to stay in the bloc. William Hill said this was the shortest odds since the date of the referendum was announced.
If polls continue to show growing support for the remain camp we could see the Pound tick a little higher versus some of the majors. However, if the polls begin to change there is scope for Sterling to depreciate as ‘Brexit’ bets return.
Euro
The Pound to Euro exchange rate remained below psychological resistance at 1.30 yesterday.
During the morning a slew of purchasing manager indexes showed that German output improved at the start of May but that it was not enough to lift private sector performance in the wider Eurozone. German activity accelerated from 53.6 to 55.2 but the Eurozone equivalent composite PMI disappointed forecasts of 53.2 with a slight drop from 53.0 to 52.9. GBP/EUR rallied in the minutes following the PMI results but Sterling was unable to hold onto its gains.
US Dollar
The Pound to US Dollar exchange rate fell back by around a quarter of a cent yesterday, plunging below technical resistance as Federal Reserve policymakers continued to make hawkish remarks.
San Francisco Fed President John Williams explicitly mentioned the ‘Brexit’ referendum, which most analysts think will be enough to deter policymakers from hiking in June, and argued that the US central bank could act before the vote. Williams noted that if rates went up and then economic conditions changed, the Fed could ‘always move interest rates back down’.
St Louis Fed President James Bullard also sounded a hawkish tone, stating that keeping rates low for too long could cause financial instability in the future. However, the relatively muted market reaction to the hawkish statements suggests that traders still expect the Fed to hold back on hiking rates next month.
Canadian Dollar
The Pound traded flatly against the Canadian Dollar yesterday as falling oil prices prevented the ‘Loonie’ from making any gains against Sterling.
Some traders expect the ‘Loonie’ to outperform the Pound this week following Wednesday’s policy meeting at the Bank of Canada. If the BOC employs positive rhetoric then we could see the Canadian Dollar jump, but falling oil prices will remain a downside pressure on the commodity-correlated currency.
Yesterday oil prices cooled as Iran vowed to ramp up oil production in defiance of agreements between major oil producing nations to curb drilling in order to drive prices higher.
Australian Dollar
GBP/AUD remained largely unchanged over the course of the day yesterday as global risk sentiment took a minor hit from the latest drop off in oil prices. Declining iron ore prices also weighed on the ‘Aussie’ as the Chinese futures market saw prices slump -5%.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate failed to sustain any lasting gains or losses yesterday on a day devoid of any meaningful data for either currency. Later today, however, the ‘Kiwi’ could suffer a little bit if trade data shows, as expected, that the New Zealand budget surplus shrunk from NZ$117 million to NZ$25 million during April.
Data Released
10:00 EUR Eurozone ZEW Survey (Economic Sentiment) (MAY) Medium 12.0
15:00 USD New Home Sales (MoM) (APR) Medium 2.0%
23:45 NZD Trade Balance (New Zealand dollars) (APR) Medium 25m