Sterling dips again on Brexit concerns, Lockhart claims April Fed hike possible
22/Mar/2016 • Currency Updates•
The Pound was under pressure on Monday, with concerns regarding the future of the UK as a member of the European Union sending the currency modestly lower against its major peers. A Brexit, which once seemed highly unlikely, is now becoming increasingly possible and this uncertainty is causing major volatility, and making forecasting more difficult.
Investors remain particularly worried about a deepening split in the Conservative Party ahead of this June’s referendum after Ian Duncan Smith, former Work and Pensions Secretary and Brexit supporter, resigned from David Cameron’s cabinet on Friday evening.
This is leading to higher levels of risk for companies exposed to GBP. Six month implied volatility in the Pound, seen as a leading indicator for concerns regarding the Brexit, remains around its highest level in almost six years.
Economic data out of the UK has done little to drive the Pound of late. Regardless, the latest inflation figures for February will draw some attention this morning, especially if we see any deviation from the 0.3% annualised figure expected.
Meanwhile, the US Dollar recovered some ground following a disastrous few days last week, which saw the US Dollar Index fall to its lowest level since October. The Greenback was buoyed by comments from Federal Reserve member Dennis Lockhart on Monday that suggested the US central bank may be in a good position to hike interest rates for only the second time in a decade at the FOMC’s next meeting in April.
The Euro was little moved despite another decline in consumer confidence, while the Chinese Yuan eased a day after Chinese authorities suggested concerns over the country’s economy and capital outflows were declining.
All in all, this week will be relatively light in terms of economic indicator data, ahead of the Easter weekend, with the major currencies likely to be driven predominantly by monetary policy expectations.
Major currencies in detail:
A lack of any major announcements in the UK economy meant that the Pound was range-bound yesterday, ending a modest 0.2% lower against the US Dollar.
Bank of England rate setter Kristin Forbes spoke on Monday morning, suggesting that an increase in risk and uncertainty could occur in the lead-up to June’s EU referendum. She also claimed that the UK current account is less vulnerable to a sudden stop in capital flows than its size would suggest.
On the data front, house prices in the UK continue to grow at a healthy pace, according to online property listings website Rightmove which suggested prices increased by 7.6% on an annualised basis this month. Meanwhile, the Confederation of British Industry suggested UK factory output fell at its fastest pace in more than six years this month.
Another data-light day ended with the Euro 0.1% lower against the US Dollar.
Consumer confidence in the Eurozone continued its downturn this month, according to the European Commission, falling for the third straight month. The monthly index fell more than expected from -8.8 to -9.7, with the modest recovery in the Eurozone economy draining optimism in the single currency bloc. The measure remains above its long-term average, although it currently sits at its lowest level since December 2014.
This week is relatively light again in terms of economic data in the Eurozone. The latest PMIs in Germany and the wider Euro-area this morning, expected to show a modest improvement, will be worth noting for those with Euro exposure.
The US Dollar was mostly stable on Monday, ending 0.1% higher against its major peers after some hawkish comments from Fed member Lockhart.
Speaking in Boston yesterday afternoon, Atlanta Fed President Lockhart reignited expectations that the Fed could be on course to hike rates again next month. Lockhart claimed the recent rate hold this month was more about ensuring recent financial volatility had settled, with economic data sufficient to justify another rate hike. He claimed that the US economy was on course for a very healthy 2-2.5% annual growth this year.
Lockhart’s sentiments yesterday echoed those of recent Fed speakers, suggesting there is an emerging consensus among policymakers that US growth remains intact despite the recent slowdown in the global economy.
Fed speakers look set to be in the spotlight this week amid a light data flow. Any further indications of a possible April or June hike would provide good support for the USD this week.
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