Sterling continues its fall while Yen rises as central bank meetings come into focus once again

Enrique Díaz-Álvarez11/Απρ/2016Currency Updates

The Euro and the US Dollar traded within narrow bands for all of last week but we did see some fireworks elsewhere in the currency markets. What this highlights is that businesses need to prepare for ongoing volatility.

The Japanese Yen strengthened further as Japanese authorities have been unable to formulate a coherent currency policy. The Yen rallied a massive 3% during the course of the week.

Sterling went the other way, pushed down further by ongoing Brexit fears and disappointing economic data. All eyes are now on the Bank of England meeting this Thursday, the central bank’s last meeting before the official start of the Brexit referendum campaign this Friday.

While the Sterling sell-off already prices in much of the uncertainty regarding UK monetary policy and a potential Brexit, this latter risk has not been factored into the Euro’s pricing yet, alongside the Eurozone’s weakening economic figures.

On Wednesday the Eurozone will release industrial production figures for February. Markets are pricing in a very sharp drop.

We expect to see significant volatility in European currencies on Wednesday and Thursday.

Major currencies in detail:


Sterling had a rough time last week.

The Brexit risk isn’t dampening investment plans, with the composite PMI business confidence indicator rising nearly one full point to 53.6.

Sterling now looks for some support from the Bank of England meeting on Thursday. While the central bank is universally expected to hold interest rates, markets will be avidly reading the minutes. A dovish tone is almost certainly anticipated.

However, we think that the BoE will acknowledge the extreme Sterling weakness and the resulting support for the UK economy. Such a suggestion may catch traders wrongfooted and we see some scope for an upward spike in Sterling as a result, albeit from very depressed levels.


The main event of last week was the publication of the minutes from the ECB’s March meeting.

While there was nothing surprising in this communication, it’s reassuring to note that there was widespread consensus on the need for monetary easing. More significantly, there was concern over the savings/investment imbalances in the Eurozone and investment weakness in spite of extremely low interest rates.

The Eurozone economy takes centre stage this week with the release of February’s industrial production data. Consensus is for a very weak reading, a drop of 0.7% in the month and a return of the YoY figure to an anemic 1.3%.

We think these numbers will bring the theme of ‘divergence’, between the Eurozone and the US, back into focus with investors. And, as a result, the Euro will struggle to maintain its current level.


As in the Eurozone, we had a light week in terms of macroeconomic data from the US, and the main news centered around the release of the Fed minutes from the March meeting.

The main takeaway here is that the Federal Reserve is increasingly divided over the future pace of interest rate hikes. Significantly, some members were ready to hike as early as April, an outcome that current market pricing has completely ruled out.

The rising hawkish faction in the FOMC probably doesn’t have the votes to force a hike in April, but we forecast a US hike in June unless financial markets take a serious tumble.

This week we will hear speeches from several Fed members. Four of them are among the most hawkish members of the FOMC: Williams, Lacker, Harker and Kaplan. We expect to see significant pushback against interest rate market pricing of less than one full hike from the Fed in 2016, which should buoy the US Dollar in currency trading.


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Written by Enrique Díaz-Álvarez

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