Despite the strong risk associated with this week’s UK EU membership referendum the appeal of safe-haven currencies such as the Euro and US Dollar has been somewhat muted. Over the weekend the opinion polls showed a shift in support back towards the ‘Remain’ campaign, prompting markets to reduce the odds of a possible Brexit. This initiated a strong resurgence in risk appetite, a move that particularly undermined the ‘Greenback’ at the start of the week.
German Producer Prices were found to have improved further than forecast on Monday morning, meanwhile, offering some additional support to the single currency. While the year-on-year figure remained deeply in negative territory this uptick nevertheless encouraged investor confidence in the outlook of the Eurozone’s powerhouse economy. If domestic inflationary pressure shows further signs of picking up through the second quarter this could be seen to reduce the chances of the European Central Bank (ECB) opting to ease monetary policy further in the near future.
Confidence in the Euro weakened somewhat in response to the news that the German Constitutional Court had rejected a challenge against the ECB’s proposed OMT programme, however. As this removed a potential barrier to one of the few untapped easing measures left in the central bank’s arsenal concerns over the dovish policy bias of President Mario Draghi rose once again. This impression was decidedly not helped along by the fact that Draghi reiterated his commitment to boosting growth in the Eurozone, appearing to leave the door open for further monetary loosening. Subsequently the EUR/USD exchange rate slumped sharply to fall to 1.1247.
This overshadowed a more encouraging German ZEW Economic Sentiment Survey, which showed domestic confidence unexpectedly strengthening from 6.4 to 19.2 in June. Growing negative global headwinds and some poor domestic data appeared to be of limited concern to investors, although this was ultimately not enough to boost the appeal of the Euro.
Growth Worries and Declining Safe-Haven Demand Weighed on US Dollar
Sentiment towards the ‘Greenback’ struggled to particularly pick-up amid the risk appetite of the early week, particularly in the wake of commentary from Fed Chair Janet Yellen. While Yellen did not adopt as dovish a tone as other members of Federal Open Market Committee (FOMC) markets were nevertheless unimpressed. With the odds of a summer, or 2016, interest rate hike appearing to diminish as the policymaker reiterated the data-dependence of the Fed’s policy decisions the US Dollar slipped further against rivals.
Worries over the outlook of the US economy were boosted on Thursday after the IMF announced that it had lowered its growth forecast for 2016. As US GDP is now predicted to clock in at 2.2% rather than 2.4% sentiment towards the ‘Greenback’ was severely undermined, allowing the EUR/USD exchange rate to climb to a fortnightly high of 1.1411.
Could Brexit Prompt Renewed EUR/USD Downtrend?
As the final opinion polls suggested that the ‘Remain’ campaign still had a narrow lead investors continued to bet on the UK voting to stay within the EU. With a vote to leave expected to have a negative impact on the future of the EU and the Eurozone by extension, the Euro is considered to be more exposed to Brexit-based risk. Thus the single currency benefitted from the apparent reduction in the likelihood of a ‘Leave’ camp victory, remaining on stronger form against the US Dollar throughout trade on Thursday.
These gains may ultimately prove limited, however, if the polls are found to have failed to correctly predict the outcome. If Friday morning brings a vote for Brexit then the EUR/USD exchange rate is likely to slump, with safe-haven demand expected to strengthen significantly. Should the UK opt to remain, on the other hand, then the Euro is predicted to remain on an uptrend against the ‘Greenback’. Whatever the result of the EU referendum there is expected to be heightened volatility on the EUR/USD exchange rate ahead of the weekend.