Sterling
The EU referendum debate raged on fiercely yesterday in parliament, on the Today programme and even on the Thames.
Chancellor George Osborn leaked a brutal post-‘Brexit’ emergency budget that contained a further £30 billion in tax rises and spending cuts that would supposedly be required to fill the hole from lost economic output in the event of a vote to leave the EU. A mutinous group of 57 Tory MPs labelled the austerity measures a punishment budget and promised to vote against them, while pointing out that Osborne would most likely be forced out of the job following a ‘Brexit’ anyway.
Nigel Farage and other ‘Brexit’ campaigners took a flotilla of 30 fishing boats down the Thames in defiance of EU fishing laws. The fleet then entered a bizarre standoff after encountering a ‘Remain’ ship, led by Bob Geldof. Insults and water cannons were sprayed about the nautical scene as both parties vied to get their points across.
Not far away, in parliament, Prime Minister David Cameron responded to questions at PMQ, mostly regarding the controversial emergency budget leaked during the morning.
Despite all the action, sentiment ahead of the EU vote didn’t appear to shift much and neither did demand for the Pound.
Euro
Yesterday Sterling rallied against the Euro during the morning before falling back during the afternoon.
British data came in positively, with the unemployment rate falling -0.1% to an eight-year low of 5.0% thanks to a 55,000 surge in job creation. The surprisingly strong employment figures were accompanied by a better-than-anticipated set of wage numbers, showing that contrary to fears of a fall to 1.7%, wage growth continued to increase by 2.0% during April.
Although the upbeat data was a welcome surprise it had little impact on the Pound to Euro exchange rate, which has practically decoupled from economic results over the past few weeks.
The Bank of England’s policy announcement at midday is likely to be one of the least watched in years – not because it comes only a few hours before the England vs. Wales Euro 2016 match – but because analysts are almost certain that the BoE will not alter policy this close to the referendum.
US Dollar
Data showed that US manufacturing production shrank -0.4% in May in another sign that the world’s largest economy is not running as smoothly as hawkish policymakers would hope.
‘Cable’ found itself around 5 cents higher on the day coming into the Federal Reserve’s policy announcement, which saw the US central bank leave interest rates on hold at 0.25%-0.50%.
Sterling rallied by a further 50 pips following the announcement as investors reacted to a shift in outlook to one or two hikes this year, down from two hikes previously. The US central bank also lowered its 2016 GDP forecast from 2.2% to 2.0% and noted that monetary policy tightening would be less aggressive than previously estimated going forward from 2017. Fed Chairwoman Janet Yellen acknowledged the ‘Brexit’ threat and hinted that rate rises could be delayed further if Britons vote to leave the EU next week.
Canadian Dollar
Sterling rallied by around 170 pips yesterday as oil prices slumped on news of higher US stockpiles.
During the evening demand for the commodity-sensitive ‘Loonie’ softened further despite the Fed’s decision to hold rates. The Canadian Dollar is seen as a volatile currency, due to its close relationship with oil prices, and would normally be expected to rally following a dovish central bank statement south of the border.
Australian Dollar
The Pound remained fairly flat against the Australian Dollar yesterday as sanguine UK labour market data weighed out the influence of the dovish Fed policy statement. Despite the considerable commotion in London regarding the pros and cons of ‘Brexit’, there were no perceptible shifts in sentiment either way and this helped leave Sterling on a neutral footing.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate remained fairly flat during the London session yesterday as dairy prices flatlined at the latest GlobalDairyTrade auction. Dairy is New Zealand’s most lucrative export and as such swings in its value often have a sizable impact on the volatile ‘Kiwi’ Dollar.
Data Released
09:30 GBP Retail Sales (YoY) (MAY) Medium 3.8%
10:00 EUR Euro-Zone Consumer Price Index (YoY) (MAY F) Medium -0.1%
12:00 GBP Bank of England Rate Decision (JUN 16) High 0.50%
13:30 USD Consumer Price Index (YoY) (MAY) High 1.1%