Financial markets very volatile, Sterling tanks as EU referendum jitters continue
17/Φεβ/2016 • Currency Updates•
The currency markets remain extremely volatile this week as investors’ concerns surrounding the likelihood of interest rate hikes, the Brexit as well as a further global economic slowdown remain.
These uncertain times make international businesses look to create annual budget levels to ensure that profitability remains high.
In the UK, Brexit concerns have been driving Sterling down this week, against both the Euro and the US Dollar. The Pound fell to a two-week low against the latter and erased much of its recent recovery after the currency hit a seven-year low last month.
The decline in the UK currency came despite some encouraging, albeit still weak, inflation figures, which should dispel some concerns that the Bank of England may cut rather than hike interest rates in the coming months.
Oil prices fell for the day after Saudi Arabia and Russia, two of the world’s largest oil producers, both agreed to freeze output rather than cut it, as had been anticipated. Predictably, this sent the safe-haven Japanese Yen higher and commodity-dependent currencies lower.
Tonight’s Federal Reserve minutes from the US central bank’s January meeting will attract the most attention in the currency markets when released at 7:00pm UK time.
The UK Office for National Statistics will be releasing the latest labour report. Earnings growth and unemployment figures, both scrutinised heavily by the Bank of England, will be of key importance to Sterling traders.
Major currencies in detail:
EU referendum jitters and a mild flight away from riskier assets sent the Pound 0.9% lower against the US Dollar and 0.8% down versus the single currency on Tuesday.
There were signs of inflationary pressures returning to the UK economy yesterday after headline consumer price growth edged up by 0.3% in January, its highest level in 12 months. The slightly more encouraging figure came following an easing in the fall of food and petrol prices.
In contrast, core inflation dipped marginally on an annualised basis. Excluding volatile prices, inflation rose by 1.2% in the year to January, less than the 1.4% recorded in December and marginally below consensus.
While inflation is expected to gradually tick upwards in the coming months, it remain low and well below the central bank’s 2% target.
The Pound looks set to continue to be driven by developments on the EU draft deal ahead of this Thursday’s summit.
A mixed session for the Euro saw the currency end higher against the Pound and 0.15% lower against the US Dollar amid weak Eurozone data.
Economic sentiment in the Eurozone continued its decline in February. The monthly measure from ZEW fell from 22.7 to 13.6, its lowest level in well over a year.
German sentiment in particular performed poorly, slumping to an index of 1 from 10.2, in line with heightened financial market volatility and a deterioration in global economic conditions that has caused many central banks to ease monetary policy.
The Eurozone will likely take a back seat today, with significant announcement in the UK and US likely to drive currency movements. The latest trade balance data will, however, be worth noting, and could cause moderate volatility in the Euro.
The US Dollar gained across the board including almost every major currency barring the Japanese Yen, which recommenced its appreciating path against the US currency. The US Dollar index climbed by 0.25%.
Economic data in the US yesterday was fairly poor. The National Association of Home Builders Housing Price index fell to 58 from 61, while the New York Manufacturing index fell again, with a strong US Dollar continuing to weigh on output in the sector.
The market mostly overlooked comments from Fed member Patrick Harper, which fuelled talk that a Fed rate hike could be delayed. The Philly Fed President suggested there was no rush to hike due to low inflation, with more ‘meaningful’ hikes likely to come in the second half of the year.
A series of second-tier economic data before the Fed announcement today will be worth noting. Housing and industrial production figures this afternoon could cause some Dollar movement during London trading.
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