GBP/EUR – Slumps to 1.17
Since the UK voted to sever ties with the European Union the domestic political landscape has been tumultuous and the Pound has spiralled lower against the Euro, hitting 1.17 on Tuesday. As the race for Tory leadership heats up, investors fear that frontrunner Theresa May will only exacerbate the rift between the UK and the EU. May has refused to guarantee the rights of EU citizens currently living in Britain. Domestic data has already shown the damage of uncertainty in the build up to the referendum. Now that the UK has voted to leave the EU, many investors predict further Sterling losses as insecurities mount. Sterling has, however, edged away slightly from its worst levels thanks to consolidative trade. British stocks also continue to advance after the Bank of England (BoE) Financial Stability report strongly hinted at the likelihood of stimulus measures.
GBP/USD – Remains at worst levels since the 1980s
In the aftermath of Brexit the US Dollar strengthened considerably thanks to heightened demand for safe-haven assets. This was a major concern for investors as the high USD trade weighting is likely to cause the Federal Reserve to delay a benchmark interest rate hike. The detrimental impact Brexit is having on the global economy also makes for an unfavourable environment for tighter Fed policy. During Wednesday’s Asian trade the GBP USD exchange rate dropped to a fresh 31-year low, but ongoing concerns of overvaluation and consolidative trade saw the exchange rate recover from intraday lows. The publication of meeting minutes from the Federal Open Market Committee (FOMC) interest rate decision may provoke volatility, especially if the report shows a consensus among policymakers that the next rate hike will be delayed for a significant period.
USD/GBP – Can Sterling beat the Brexit blues?
With British data predicted to print increasingly poorly, there is a good chance that the USD GBP exchange rate will extend gains. However, much of the data relates to a pre-Brexit Britain so the results may be considered obsolete before publication. Additionally, the US Dollar is showing little sign of advancing in risk-off trade, so there is a possibility that Sterling will recover some of its losses against its North American counterpart.
EUR/USD – Trending narrowly as Brexit fallout weighs on EUR exchange rates
In the wake of the UK’s Brexit vote, significant Italian banking concerns have come to light. Italian Prime Minister Matteo Renzi was denied a request to use public funds to bailout banks. This is because the newly founded EU banking union states that bailouts must be funded by creditors. Should Renzi defy EU rules the fallout could be more damaging to EU stability than Brexit. Furthermore, Italy is in the process of voting for a complete overhaul of its political system. If Renzi fails to win the vote, however, he has announced he will resign. This could give rise to Eurosceptic populist parties which could eventually result in Italy following the UK in leaving the EU. Another issue weighing on demand for the single currency is damp market sentiment pushing bond prices higher and yields lower. This has caused many traders to fear that the European Central Bank’s (ECB) asset purchase programme will not have the desired impact.