May appointment supports Sterling, Yen falls sharply for second day

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13 July 2016

thomasdodds

Sterling continued to rally sharply on Tuesday, extending its two day gain to almost 3% against the US Dollar as investors breathed a sigh of relief following the announcement that Theresa May would be taking over as Britain’s Prime Minister later today.

T
he prospect of a delayed triggering of Article 50 has improved sentiment towards the Pound in the past couple of days, with the currency rallying by the most since the referendum.

This comes despite Governor of the Bank of England Mark Carney laying further groundwork for an increase in monetary stimulus in the UK this summer. Financial markets are increasingly pricing in the possibility of an interest rate cut in the UK at this month’s meeting.

We continue to look towards the Bank of England’s monetary policy meeting tomorrow as the major event in the currency markets this week. We expect the central bank to announce at least a 25 basis point cut to a record low of 0.25%, with the possibility that it could hint further quantitative easing is on the way soon.

The Japanese Yen continued to fall sharply yesterday, having erased almost all of its post-Brexit gains after the weekend election victory for Japan’s ruling coalition opened the door for fresh fiscal stimulus. This has increased risk appetite worldwide, with almost every major currency barring the Yen and the Euro ending trading higher against the US Dollar on Tuesday.

The US Dollar has been driven almost exclusively by investors’ appetite for risk this week, with little in the way of major economic events in the US.

Eurozone industrial production figures this morning could be in focus today, although these will fail to take into account the post-Brexit impact. FOMC member Patrick Harker will also be speaking this morning.

Major currencies in detail:

GBP

Investors continue to cheer the appointment of Theresa May as PM, allaying fears on the timing of Article 50. This sent the Pound 1.4% higher against the US Dollar yesterday.

Sterling so far appears to be taking the possibility of a BoE interest rate cut in its stride. Consensus points towards a cut, with market pricing now in excess of 75% in favour of a 25 basis point reduction. We think this cut has mostly been priced in, and would expect the Pound to receive decent support in such an event, particularly versus the Euro.

The Bank of England’s Credit Conditions survey this morning will likely be overlooked, with focus firmly on this Thursday’s MPC meeting. Mark Carney again suggested that Sterling’s sharp fall would be beneficial to Britain’s large current account deficit on Tuesday.

EUR

Early gains for the Euro were short lived, with the currency ending 0.1% lower against the US Dollar.

German inflation figures on Tuesday morning were unchanged as expected, with consumer prices in Europe’s largest economy growing by just 0.1% in June. This doesn’t bode particularly well for Euro-wide CPI numbers later in the week, with another underwhelming reading likely to heap further pressure on the ECB to increase its monetary stimulus later in the year.

Meanwhile, growth forecasts continue to be slashed in the Eurozone following last month’s Brexit. The IMF yesterday lowered its GDP forecast for France for next year from 1.5% to 1.25%.

Industrial production figures this morning are expected to show a modest slowdown. Friday’s inflation figures for June will take on slightly more importance this week.

USD

An increase in appetite for risk sent the US Dollar lower against most currencies, although the US Dollar index actually rose by 0.15%.

Federal Reserve member James Bullard was fairly hawkish yesterday. He claimed the impact of the Brexit on the US would be effectively zero, while suggesting talk of further stimulus in the US was wide of the mark.

He did, however, suggest that just one Fed hike would be warranted for the foreseeable future. Market pricing now implies a one-in-three chance of a hike in December.

This morning’s speech from FOMC member Harker and the latest import and export price indexes this afternoon are the only major announcements today. Friday’s inflation and retail sales figures will be the main focal point in the US this week.

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