BoJo says Go, Pound says No
And so we have it, June 23rd will be the day that the UK goes to the polls to vote on its future in or out of the European Union. Despite a positive reaction on Friday night to announcement of a deal between the EU and UK which Cameron hailed as a victory, sterling has found itself back lower through the Asian session following the news that Boris Johnson will campaign for the UK to leave. His decision has prompted the single largest daily fall in GBP/USD for 12 months.
According to some opinion polls up to one third of the UK electorate see Johnson’s opinion on the matter as ‘important’ as to how they will vote. In similar polls 44% of respondents said that David Cameron’s opinion was important. Polls released over the weekend continued to show the Remain campaign enjoy a fairly healthy lead but the Leave campaign are winning the charisma battle at the moment.
Price action likely to continue
Do I think that Boris Johnson’s decision to go one way or the other is worth a 2 cent move in GBP/USD? Absolutely not, but traders and investors have been waiting for an opportunity to give sterling a smack and the Mayor of London has handed them a big old bat with which to do it. At the beginning of a year we warned that the campaign into the vote would be pockmarked by some deep falls in sterling.
Fundamentals remain strong here in the UK, but politics can always outweigh fundamentals.
Tomorrow will see Mark Carney as well as Monetary Policy Committee members Shafik, Vlieghe and Weale all testify to the Treasury Select Committee on the Bank of England’s latest Quarterly Inflation Report; it would be naïve to think that a fair lump of questions will not be about the European Referendum.
Today’s Sterling Update, released this afternoon, will include our EU Referendum Briefing Note: “Something Wicked This Way Comes”. In it we take a look at the likelihood of a Brexit, how sterling will likely behave through the campaign and what may happen to the pound should the Leave camp triumph.
As we can see from the overnight price action it’s going to be a long 4 months.
US inflation beginning to build
In somewhat more positive news, inflation data from the United States showed the largest gain in 4 years through January. Core CPI rose by 0.3% on the month with gains seen in shelter, apparel, food, energy and transport components. The fact that many sectors are reporting price gains is a net positive and combines with the lowest unemployment rate and signs that wages are starting to recover.
The news is unlikely to foreshadow a move by the Federal Reserve to increase interest rates in March but solidifies our thoughts that a couple of rate rises this year – one in June, one in November – are likely and that the USD will maintain its outperformance through the year.
Eurozone corporates expected to increase optimism
While media and markets will largely be focused on the UK/Brexit story and the travails of the pound as a result, Eurozone preliminary PMIs will be an interesting indicator of whether the European Central Bank’s recent reforms are having any influence on the spending and buying decisions of European corporates.
Elsewhere the data calendar is relatively quiet through the week with highlights being US consumer confidence (tomorrow) and UK and Eurozone GDP due on Thursday.