Sterling rebounds as Bank of England delays monetary stimulus, Turkish Lira hit by coup attempt

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18 July 2016

Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

Speculative bets against Sterling reached near-record levels last Tuesday (Figure 1). Such stretched positioning often leads to strong contrary moves and we certainly saw that last week.

he Bank of England left rates unchanged, though it all but guaranteed a cut, and short Sterling traders scrambled to cover their positions, which sent the Pound sharply higher for the week. The upwards movement in Sterling was tracked very closely by stock markets worldwide and risk assets generally, as investors increasingly expect another round of monetary stimulus, not only from the Bank of England but also from the ECB and Bank of Japan.

The news from Turkey hit the wires just as the last New York traders headed out for the weekend. The Turkish Lira experienced its sharpest sell-off since the 2008 crisis, with other emerging market currencies also experiencing losses. The coup’s failure appears to have improved sentiment in early Monday Asian trading and, other than the Lira, emerging market currencies have mostly bounced back to early Friday levels.

Expect much volatility this week, when we finally see the first firm readings of the economic fallout from the Brexit referendum. The key UK PMI business sentiment indicators for July all come out on Friday, preceded by Eurozone PMIs on Thursday. In the UK very sharp falls are expected down to contractionary levels, while more subdued falls are anticipated in the Eurozone surveys. It is likely that any surprise relative to these market expectations will drive very sharp currency fluctuations.

As if this weren’t enough, we also get the ECB July meeting on Thursday. No change in policy is expected but markets will scrutinize Draghi’s press conference for any hints that the ECB is considering further easing of monetary policy to mitigate the macroeconomic damage from the UK’s EU referendum outcome.

Major currencies in detail:


Sterling soared to its highest level this month on the back of the surprise announcement that just one member of the Bank of England’s MPC, Gertjan Vlighe, voted in favour of an immediate interest rate cut this month.

However, the Bank of England hinted that a ‘package’ of easing measures would be on the way at the August meeting. We think the Bank of England is almost certain to cut rates by 25 basis points at next month’s meeting.

All eyes are now on the July PMI business sentiment indices on Friday. These surveys of business managers will be the first systematic reading of the impact of the EU referendum result on the willingness of corporations to invest, hire and make purchases – the key mechanism by which uncertainty impacts the economy.

Markets are penciling in a drop in the composite index from 52.4 to 48.5, well below the expansion/contraction line of 50. However, given the unprecedented situation, this estimate is little more than a guess. There is no doubt that by the end of trading Friday we will have far better sense of the post-referendum damage to the UK economy than we do at present.


We also have a critical week for the Eurozone. In addition to the ECB July meeting, we will see, as in the UK, the first signs of the damage to business confidence caused by the UK referendum results.

Again, estimates are little more than a guess but consensus is expecting falls of just over half a point in the composite index, from 53.1 to 52.5, which would bring it down to the lowest point since early 2015. A negative surprise here would bring serious pressure on the common currency and probably cause it to break the 1.10 level against the US Dollar decisively.

Just as important will be the comments from Draghi’s post ECB meeting press conference on Thursday. We expect Mr. Draghi to provide some clarity, not only on the potential for further easing on the wake of the UK referendum, but also on the possible solutions for the Italian banking system.


Last week we received June data on both US retail sales and inflation. Both releases were modestly supportive of further Fed interest rate hikes.

Retail sales surprised significantly to the upside and the three month average core number, which excludes automobiles and gas, is now growing at a 5% annualised rate. For its part, core inflation, which excludes more volatile food and energy components, ticked up to 2.3% on the year, in a further sign that some tightening of monetary policy is warranted.

Market-implied probability of a further Fed hike in 2016 is now up to nearly 50%. This is still far too low in our view but certainly a massive change from the 10% likelihood priced in by markets in the immediate aftermath of the UK’s EU referendum. As this key metric continues to rise, we expect the US Dollar to be well supported against every other major world currency.

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Figure 1: Speculative Sterling Positioning (2011-2016)