Sterling
The Pound managed to rally against the majors again yesterday as plucky traders tentatively bet that Britain may not go through with the referendum after all.
Most developments yesterday appeared to support further depreciation of the Pound: Fitch predicted Britain will suffer a ‘large investment shock’ in the aftermath of the ‘Brexit’ vote, the Economist Intelligence Unit joined a chorus of forecasters in estimating that the UK will fall into recession next year, while credit insurance firm Atradius warned that business insolvencies could accelerate 4% in the wake of the vote.
However, the government’s dithering in terms of triggering Article 50 to initiate the two-year EU divorce process has given hope to those who wish the UK to remain part of the European Union. Analysts at Credit Suisse are speculating that there is currently a 30% chance of a second referendum and this appears to be propping Sterling up at the moment.
Euro
The Pound to Euro exchange rate strengthened by around 50 pips yesterday as a so-called ‘Brelief’ rally took place in financial markets. The FTSE 100 UK stock index rose 2% and Sterling ticked higher across the board, however, the majority of analysts expect the Pound to trend lower over the coming weeks.
Uncertainty reigns supreme over the UK economic and political outlook – Will Scotland vote again on independence? Will Ireland follow suit? Will the UK get a good trade deal? Who will be Prime Minister? etc. – but one thing seems more predictable and that’s that the UK will fall back into recession over the next 12 months. The threat of recession combined with the brutally uncertain outlook means that investor confidence is more likely than not to collapse again.
US Dollar
‘Cable’ gained around 100 pips yesterday as ‘Brelief’ rallies took place, potentially influenced by hopes that the next Tory Prime Minister will hold a parliamentary vote, a second referendum or a new election in an attempt to keep Britain in the European Union.
The Pound to US Dollar exchange rate is currently over three cents stronger than the 31-year low struck on Monday. If analyst predictions of further Sterling losses are to be believed then the current GBP/USD rate could be seen as an attractive proposition.
Bank of England Governor Mark Carney announced yesterday that he would be holding a speech at 4pm this afternoon. Carney’s second post-‘Brexit’ vote appearance could potentially shape market sentiment for the day. If the bank chief announces any new stimulus measures then Sterling could weaken. But if he hints at tightening measures to prop-up the Pound: it may just work.
Canadian Dollar
The Pound to Canadian Dollar exchange rate ticked higher by around 50 pips yesterday as profit-taking continued to push Sterling higher following the sharp devaluation over the weekend.
Oil prices jumped in response to the sixth consecutive week of falling crude inventories in the US, which spurred hopes that the global supply glut could be loosening. However, the value of Canada’s most lucrative export had less of an impact on the ‘Loonie’ than usual because of the understandable global fixation of Britons’ decision to vote against retaining EU membership.
This afternoon’s Canadian GDP could have more of an influence on the ‘Loonie’ if it shows an acceleration from 1.1% to 1.4% growth, as expected.
Australian Dollar
Sterling lurched higher by around half a cent yesterday against the Australian Dollar as profit-taking continued to drive the Pound higher across the board.
The initial market reaction concerning the ‘Aussie’ Dollar was to sell against the safe havens on fears that risk-sensitive assets could face a turbulent future shrouded in uncertainty. However, there is an argument to suggest that the Federal Reserve is unlikely to tighten policy following the ‘Brexit’ vote, and could even unleash more stimulus. Certain investors are betting that demand for the ‘Aussie’ could increase if the world’s major central bank’s boost liquidity in financial markets with more cheap money.
New Zealand Dollar
The Pound rose by around half a cent against the New Zealand Dollar yesterday but GBP/NZD struggled to eke out any significant gains. The hope of coordinated central bank stimulus was enough to tempt some traders to invest in the volatile ‘Kiwi’.
Data Released
09:30 GBP Gross Domestic Product (YoY) (1Q F) Medium 2.0%
10:00 EUR Euro-Zone Consumer Price Index Estimate (YoY) (JUN) High 0.0%
12:30 EUR ECB account of the monetary policy meeting Medium
13:30 CAD Gross Domestic Product (YoY) (APR) High 1.4%