FX markets on hold as focus shifts to US payrolls and Italian referendum

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28 November 2016

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.

Currency markets took a break from the torrid volatility we had seen since the US Presidential Election.

he Euro managed to rebound from its two-year low against the US Dollar to end the week nearly unchanged. Meanwhile, we saw an unusual divergence in emerging market currencies. Strong rallies were recorded in the South African Rand and the South Korean Won, matched by equally sharp falls in the Brazilian Real and the Turkish Lira.

The Italian referendum this Sunday will be the focus of investor’s attention next week. However, we think that a “no” result has largely been priced in by the markets and we expect no worse than a modest Euro sell-off in response. An establishment-friendly “yes” result would undoubtedly lead to a short-term bounce in the common currency. However, latest polls showing “no” ahead mean this is the less likely outcome.

Major currencies in detail


Sterling’s reaction to the Autumn Statement was modestly positive. There was a large upward revision to the borrowing projections for the next few years, following the reduced growth forecasts post-Brexit.

While this is not a shocking decision, it is another step in the worldwide retreat from austerity policies. As in the US case, the reaction from currency markets was positive.

This week Sterling should take a step back from the limelight. The economic and monetary calendars are both very sparse and Sterling will mostly react to news elsewhere. Most notably, the US payroll report on Friday.


Not much attention has been paid to the Eurozone economy lately and with good reason; political events worldwide have taken centre place.
However, last week we saw a significant improvement in the most relevant leading indicator for growth, the PMI business confidence index. The composite of manufacturing and services rebounded unexpectedly to a 2016 high of 54.1.

Short-term pressures on the Euro will continue to build as US rates rise and political risks build, but a push in growth to above 2% in 2017 is possible given the confidence numbers and recent Euro depreciation.


The November US payroll report on Friday is unlikely to affect the near certainty of a December Federal Reserve interest rate hike.
Nevertheless, the report’s tone will certainly drive currency markets. A strong report, with job creation above 200,000 and wage growth continuing to accelerate toward 3% would put pressure on FOMC members to revise upwards their projections for US growth, inflation, wages and therefore future Fed hikes.

Most other key economic indicators in the US, including retail sales, the housing market and durable goods, have shown signs of acceleration. It is likely that the job market follows this trend on Friday.

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