BREXIT appears to have been underestimated...

Week Commencing Monday 11th April 2016

Overriding Market Themes

Sterling was a modest under-performer last week.  UK data was disappointing, with February industrial production falling 0.3% m/m (market consensus +0.1%) and manufacturing fell 1.1% (market -0.2%). January output data was also revised lower. Our UK strategist feels that UK GDP should hold up (around 0.5% q/q), providing the services sector remains relatively buoyant. However, February’s visible trade deficit was wider than expected.Sterling was a modest under-performer last week. UK data was disappointing, with February industrial production falling 0.3% m/m (market consensus +0.1%) and manufacturing fell 1.1% (market -0.2%). January output data was also revised lower. Our UK strategist feels that UK GDP should hold up (around 0.5% q/q), providing the services sector remains relatively buoyant. However, February’s visible trade deficit was wider than expected.

David Cameron has had an uncomfortable week and conceded that he had an interest in an offshore fund, but the investment was liquidated years ago. It remains to be seen whether the PM’s lack of clarity will have an impact on an apparently tightening the “Brexit/Bremain” debate.

The Euro was in a tight range last week with no follow-through buying evident at all after last week’s push higher from the mid-1.11s vs the USD. Investors sitting on long EUR positions will, however, be concerned that the market’s momentum appears to have fizzled out near the upper end of the recent trading range. Options positioning is heavily favouring EUR downside again in the short run, suggesting market participants think the EUR looks toppish. Bolstering the Euro rally has also been European Central Bank policy, with President Mario Draghi now appearing to back away from talking down the Euro to help boost exports and inflation. Since December the GBP/EUR rate has reversed aggressively, from multi-year highs around €1.42 to around €1.23 yesterday – a 22-month low.

Last week the US dollar fell to another new multi-month low against the Euro. With the Federal Reserve raising its concerns about the global economy, traders see only a 3% chance of a US rate hike on April 27.

 

GBP This Week

The Pound faces several important announcements this week. Starting with CPI Tuesday before the UK Electoral Commission is set to confirm Britain's lead BREXIT campaign groups on Friday and the Bank of England will make its next interest rate decision on Thursday April 14.

Expectations from the BoE are the Monetary Policy Committee is widely expected to vote 9-0 in favour of keeping interest rates at 0.5%. Expect more comments from the BOE on the value of sterling.

USD This Week

US retail sales data on Wednesday April 13 will be the next important trading point for the US dollar, with investors looking to see if stronger US consumer demand will help off-set risks to the economy from abroad.

BREXIT risks are keeping the GBP/USD rate trading just above 7-year lows. Within the past two months, GBP/USD has fluctuated in a range of $1.45 down to $1.38.

EUR This Week

Nevertheless, downside risks for the Euro remain aplenty, with the ECB now spending €80bn per month on asset purchases which effectively debases the Euro. In addition, BREXIT also remains a key issue for the EU should Britain vote to leave on June 23.

The International Monetary Fund issues its latest World Economic Outlook tomorrow afternoon. Should the IMF talk up downside risks to the global economy, this should help the Euro outperform expectations for even longer.

 

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