As Brexit concerns continue, Sterling edges towards 1985 lows
25/Φεβ/2016 • Currency Updates•
Sterling was under heavy pressure again on Wednesday, inching perilously close to its weakest position against the US Dollar in over 30 years, having fallen to its lowest level since March 2009 yesterday.
Concerns surrounding the possibility of a Brexit continue to dominate the headlines. A fall in the price of oil back below $33 a barrel after the world’s second largest oil producer, Saudi Arabia, ruled out production cuts, weighed further on sentiment towards the Pound. The UK currency has now fallen by 5.5% against the Greenback and 7% versus the Euro since the turn of the year alone.
The Euro continues to remain mostly range-bound this week, having edged marginally higher against the US Dollar on Wednesday following the release of further weak manufacturing figures in the US economy.
The South African Rand was the worst performing currency in the world yesterday, declining by over 3% after the country’s Finance Minister slashed growth forecasts and claimed the economy was ‘in crisis’ during the annual budget speech. Large and extremely volatile movements such as these among emerging market currencies highlight the benefit to businesses of hedging their exposure in order to eliminate losses.
UK businesses with exposure to the Euro will be closely watching the latest inflation figures from Eurostat this morning, which could provide further incentive for the European Central Bank to ramp up its existing quantitative easing measures. The market is now fully pricing in a cut in the central bank’s deposit rate in March, a move we expect will recommence the Euro’s sharp downward trend against almost every major currency.
Major currencies in detail:
Concerns surrounding a Brexit sent the Pound 0.4% lower on Wednesday.
With limited economic data out of the UK this week, the Pound has been driven almost exclusively by concerns regarding Britain’s future as a member of the European Union. Telephone surveys have continued to show a strong bias towards the ‘in’ campaign whereas the ‘out’ campaign has a marginal led in overnight online polls.
UK retail sales fell more than expected in February, according to the Confederation of British Industry. The balance of reported sales volumes fell to an index of 10 from 16, with expectations for sales in the month ahead the lowest in three years.
Economic growth figures this morning came in right in line with expectations. The UK economy grew by 0.5% in the final quarter of last year, with the Pound barely moved as a result.
Wednesday’s weak US data sent the Euro 0.2% higher against the US Dollar.
Bundesbank head and ECB member Jens Weidmann was typically hawkish when speaking at an event in Frankfurt on Wednesday. Weidmann warned the Governing Council against further easing of monetary policy, claiming that there could be long-term effects of loosening an already highly accommodative policy.
The influence of the Bundesbank was one of the key factors behind the ECB’s underwhelming lack of additional economic stimulus in December and could prove a stumbling block for President Mario Draghi in obtaining unanimity among the committee for further easing in March.
Inflation figures this morning could prove a market mover today. Headline consumer price growth is expected to remain at 0.4%, well below the central bank’s 2% target.
The US Dollar fell marginally by 0.1% against its major peers yesterday, with the latest services data erasing all gains achieved during morning trading.
The service sector in the US contracted for the first time since 2013, according to the latest index from Markit, which fell to 49.8 from 53.2, massively undershooting expectations.
Comments from Federal Reserve Vice Chair Stanley Fischer were slightly more hawkish than recent comments coming out of the central bank. Fischer indicated that there was no rush to hike interest rates for a second time, although recent market turmoil may still pass without much effect on the Fed’s plans.
This is consistent with our view that the market is severely under-pricing the chance of multiple US rate increases this year.
Durable goods order figures will be the focus of trading in the US, when released at 13:30 UK time today.
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