Volatility rises in sterling as Scottish referendum looms
03/Σεπ/2014 • Currency Updates•
Sterling weakened against major currencies yesterday after polls suggested the Yes vote is strengthening. Sterling saw a 0.7% drop vs. both USD and EUR amid a YouGov poll suggesting the lead had shortened by 7 points to 42/48 Yes/No respectively. Whilst volatility is expected amid the central bank decision in the Eurozone and labour data to be released across the pond.
Yesterday saw construction PMI released above expectation at 64 vs 61.5 forecast, this did little to mitigate loses made from the Scottish independence movement, but may assist further dissent among MPC members whom are meeting tomorrow. Last month saw a 7-2 split in favour of keeping interest rates at their historical low, recent strong data will seek to convince markets of the consensus swinging sooner than anticipated. Nevertheless the Bank of England is expected to maintain 0.5%.
Of interest were comments made by European Commissioner Ollie Rehn who said that if a restructured Scotland kept the pound then it would be unable to join the EU. This is by no means a one horse race, shown by the fact that Council of Europe is considering sending in police to monitor the polling stations to ensure there is no conflict. The reason Europeans are getting involved is because both the UK Government and Scottish Parliament are refusing to provide support claiming it is the responsibility of the other party and, with such a tight outcome forecast, there is expected conflict.
Ahead today we see the release of services PMI released at 09:30 a figure of 58.5 is forecast down 0.6 from July but still above the neutral 50.
This week’s slump in euro/dollar builds on the case for the ECB to introduce a stimulus package in the form of bond purchasing when they meet tomorrow. With the most recent inflation figures and change in tone emanating from Draghi this last month, markets are in large perceiving that action is necessary, but are sceptical about the ECB’s capability to produce the extent of stimulus needed. The ECB has hired Blackrock to advise on a “Simple, Transparent, and Real” asset backed security purchasing scheme however, as to what this means in practical terms, no one seems to know.
President Obama is visiting Eastern Europe in attempts to calm recent tensions and reassure other NATO members of their security, despite commentary from the Kremlin seeming to stoke further conflict. Mikhail Popov the deputy secretary of Russia’s National Security Council was quoted saying NATO’s actions were a key external threat to Russia, and Putin himself saying if he wanted to he could take Kiev in two weeks. This was amid NATO pledging a stronger presence in Eastern Europe on Monday. However it seems markets have already priced this conflict in, for now.
With little data out yesterday the euro remained fairly flat. Retail sales are released today with a 0.9% YoY increase forecast down from 2.4% last month.
Strong data was released yesterday with ISM Manufacturing above expectations at 59 vs. 57 forecast, demonstrating a continuation of the increasing growth in manufacturing since the US’s polar vortex in January. Furthermore construction spending was up 1.8% vs 1% forecast, which has furthered the trend of dollar strength we have seen over the last few months.
The beheading of a second US journalist yesterday by ISIS has increased speculation of further military intervention. The murder appears to have been conducted by the same British suspect as last time, whom is quoted in the video saying that this is a «second message to America». What is of concern is that during the three minute video the name of a British hostage also flashed up on screen. With ISIS seeming to further provoke conflict expect continuing geopolitical issues here.
Looking forward today we see both MoM factory orders released at 14:00 and the Fed’s beige book at 18:00, both will give forward guidance to the markets as to the big labour data out later in the week, namely initial jobless claims tomorrow and Non-Farms on Friday.
Rest of the World
Yesterday saw the Australian central bank maintain a rate of 2.5% in line with expectations and Aussie GDP out this morning at 3.1% down from 3.4% last month.
The Bank of Canada is releasing its rate decision at 14:00 today. This is expected to remain at 1%, and we have the Bank of Japan monetary policy statement in the early hours of tomorrow.