Sterling
So here it is: referendum day is upon us. After months of speculation, mudslinging and volatile trading conditions the financial and political event of the year is finally here.
Investors appeared to be caught in the eye of the storm yesterday as Sterling traded flatly versus most of its peers ahead of the crucial vote. Polls continued to show a tightly contested vote but betting agencies’ implied probability of a vote to stay in the EU remained just below the 80% mark. Sterling maintained its recent gains indicating that, although markets are on their toes, financial traders trust the odds put out by the betting companies. The cost to insure against large swings in the value of the Pound slid to 40%, down from 50% last Friday.
Euro
The Pound to Euro exchange rate hovered near a three-week high for the majority of yesterday’s session as investors refrained from large moves ahead of today’s EU vote.
The Pound could fall towards 1.20 in the immediate aftermath of the referendum if Britons vote to leave the bloc, and analysts warn that GBP/EUR could slide to parity by the end of the year following a potential ‘Brexit’. On the other hand, if the UK votes to maintain its EU membership then we could see Sterling rally towards 1.36-1.40 fairly rapidly.
In the longer term, ‘Brexit’ would likely put pressure on the single currency if it fanned the flames of discontent on the continent and boosted support for splinter groups in other nations, such as Germany, Greece, Holland, Italy, Spain and Portugal. ‘Brexit’ could potentially throw the Euro back into an existential crisis, unleashing an awesome wave of uncertainty that could easily cause the Euro to crash land over the next year or so.
US Dollar
Sterling reached a new five-month high against the US Dollar yesterday.
The repercussions for GBP/USD following the vote are extreme: if Britain elects to leave the EU then the Pound is expected to devalue towards 1.35 and potentially a 30-year low of 1.30. If the ‘Remain’ camp comes out on top then we are likely to see Sterling rise through 1.50 and head towards 1.55 over the next few weeks.
The Federal Reserve has recently softened its outlook for monetary tightening and this is weighing on demand for the ‘Greenback’. However, it is possible that global markets could rally if Britain remains in the EU and this could prompt a hawkish shift in Fed policy. A July hike is still a possibility, but analysts warn that the Fed’s September meeting might be deemed too close to the US presidential election for a potentially destabilising round of monetary tightening. At the start of the year the Fed forecast four rate hikes in 2016, at the moment we are looking at no more than one.
Canadian Dollar
The Pound reached a 20-day high against the Canadian Dollar yesterday, despite a rebound in Canadian retail sales, as markets prepared for today’s referendum.
Canadian retail sales rose 0.9% in April to hit a record CS$44.3 billion. It was a strong performance all around but a 6.0% jump in petrol station sales was the primary driver behind the upbeat figure.
Australian Dollar
The Pound to Australian Dollar lost a little bit of ground yesterday although Sterling remains six cents higher than it was this time last week.
As a perceived riskier currency, with close links to global risk sentiment and commodity prices, the ‘Aussie’ Dollar is often susceptible to large swings in value. This makes it very difficult to predict how far Sterling could rally or fall against the Antipodean currency in the aftermath of the EU vote. But be warned, the moves could be massive.
New Zealand Dollar
The Sterling to New Zealand Dollar exchange rate remained strong yesterday as nervous investors avoided significant moves ahead of the EU vote.
Data Released
GBP UK-EU Referendum Vote (“Brexit” Vote) High
09:00 EUR Markit Eurozone Composite PMI (JUN P) Medium 53
14:45 USD Markit US Manufacturing PMI (JUN P) Medium 50.9