The Pound to US Dollar exchange rate softened last week as ‘Brexit’ fears spooked traders.
‘Brexit’ Jitters Weigh on Sterling
‘Cable’ began last week’s session at around 1.46 but demand for Sterling soon shrank and GBP/USD dipped below 1.45 on Tuesday in response to new EU referendum polls. An ICM survey showed that 45% of respondents were in favour of leaving the European Union, compared to just 42% who would vote to remain. Demand for Sterling collapsed following the publication of the poll as ‘Brexit’ bets proliferated.
US data showed that the Fed’s preferred gauge of inflation held steady at 1.6% but traders were concerned by a surprise fall in consumer confidence from 94.7 to 92.6 and a contractionary Chicago business PMI score of 49.3.
EU uncertainty grew on Wednesday, and so did demand for the ‘Greenback’ against the Pound. A new YouGov poll put the ‘Remain’ camp and the ‘Brexit’ campaign on level terms, which prompted traders to hedge against the possibility of large Sterling swings over the next month and subsequently make it more expensive to protect the value of investments denominated in the UK currency. This drove ‘Cable’ briefly below 1.44.
Dud NFP Report Lifts GBP/USD
GBP/USD remained fairly flat on Thursday before the Pound was given a shot in the arm on Friday afternoon.
Compared to calls for a score of around 160,000, the headline May non-farm payroll figure printed at a dismal 38,000. The dreadful figure marked the worst month of job creation since 2010 and was seen to reflect badly on the chances of a near-term rate hike from the Federal Reserve. ‘Cable’ appreciated by around a cent to 1.45 following the NFP report.
Other elements of the labour market report were less downbeat; average earnings ticked higher by 2.5% and unemployment dipped from 5.0% to 4.7% – albeit due to an unwanted decline in the participation rate. However, markets focused solely on the terrible job creation figure, which was around four times lower than investors had been primed for.
Week Ahead
The concerning NFP report makes this evening’s speech from Federal Reserve Chairwoman Janet Yellen all the more interesting. After weeks of hawkish rhetoric it will be difficult for the central bank chief to revert back into full-on dovish mode, but it will be equally troublesome for Yellen to carry on as if nothing has happened and talk up the prospects of tighter policy.
If Yellen is seen to leave the door open to a June hike, or explicitly gives the nod for a July rise, then the US Dollar is likely to claw back all of its recent losses and then some. However, if she highlights the fragility of the global economic recovery and focusses on the labour market figures then the Pound to US Dollar exchange rate could rally.
Of course, volatility can be expected following the release of each new EU opinion poll survey as the referendum approaches. For example: this morning’s ICM report gave the ‘Brexit’ campaign a five-point lead and subsequently GBP/USD tumbled by around half a cent. Future polls will likely hold similar sway.
Heads Up
Summary of major upcoming data releases that we think may move the market.