Sterling and Euro stabilise following sharp Brexit sell-off
29/Jun/2016 • Currency Updates•
The Pound and the Euro both held steady on Tuesday, experiencing some respite following a brutal few days for both currencies after last week’s shock Brexit vote.
Sterling rallied around 1% from Monday’s close as markets took a breather and possible profit taking took place.
Stock markets around the world also stabilised. The FTSE 100 ended around 3% higher, while European stock markets rallied, aided by a recovery in the banking sector. So far, the absence of any major casualties from the turmoil suggests that the world’s key financial institutions are more stable and resilient than they were in 2008.
The UK currency, however, remains a significant 11% down from Friday night’s high as concerns surrounding both the political and economic ramifications of an EU exit loom large.
The resilience in Sterling and UK shares was even more remarkable given Standard & Poor’s announced on Monday evening it would be downgrading the UK’s credit rating from AAA to AA in the wake of the country’s Brexit vote.
Fitch has already lowered its UK rating from AA+ to AA, citing an ‘abrupt slowdown’ in growth in the short term. On Friday evening, Moody’s also cut the UK’s credit rating outlook to ‘negative’, echoing similar concerns from the Bank of England that the UK economy is on course to slow, to the point of risking recession, in the second half of the year.
Meanwhile on the politics front, Jeremy Corbyn’s position as leader of the Labour party became increasingly untenable yesterday after the party’s MPs passed a vote of no confidence in his leadership by 172 votes to 42.
The Tories are set to hold their leadership contest in September, which amounts to another two months of uncertainty until the new Prime Minister could conceivable trigger Article 50 and start Britain’s official exit from the EU. Some of the most respected analysts are suggesting that only Parliament can trigger this process, which adds to the sense that the exit may be significantly delayed.
The UK economy looks on course for a raft of tax rises and spending cuts following last Friday’s Brexit ‘shock’, according to Chancellor George Osborne yesterday. This does not bode well for the UK’s short term economic outlook.
With the political and economic backdrop now increasingly unclear, we think yesterday’s modest Sterling rally could prove temporary, rather than the start of an upward trend. Monday’s 30 year low in GBP/USD is likely to be tested in the coming days as the political ramifications continue to unfold.
Other major currencies:
The Euro stabilised, although there was little change against the US Dollar yesterday, with the currency rallying by just 0.1% during London trading.
A number of senior ECB officials spoke on Tuesday, including President Mario Draghi, with none of them seeming in a rush to ease monetary policy.
Rate-setter Coeure claimed that the existing quantitative easing programme was working well, while suggesting it was too early to talk about a recession in the Eurozone following last week’s Brexit. He claimed there was no real urgency to coordinate action with other central banks, although expected this to change should inflation and growth in the Euro-area continue to disappoint.
Eurozone confidence numbers and consumer prices are set to be released in the Eurozone this morning. The market may overlook these reports given they were measured prior to the Brexit result.
The US Dollar Index was unchanged yesterday, despite investors continue to push back their expectations for the next Fed interest rate hike.
In the wake of last week’s Brexit, financial markets are now pricing in zero chance of a rate increase until the Fed’s December meeting.
Economic data yesterday painted a fairly brighter outlook for the US economy. First quarter GDP growth was unexpectedly revised higher to 1.1% from 0.8%. Consumer confidence also rose sharply to an eight month high of 98 from 92.4, although it’s worth noting that the cut-off for the poll was one week before last Friday’s Brexit vote. Expect this number to slow in the coming months as concerns regarding contagion in the Eurozone begin to grow.
We’re set for a host of economic releases in the US today. Personal income and spending figures will be closely watched when released at 13:30 UK time. Unlike Tuesday’s figures, these numbers may be weak due to the recent slowdown in wage growth and retail sales.
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