Sterling stabilises and stock markets bounce back as little immediate change in Brexit process

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4 July 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.

Markets appear to be taking the EU referendum result very much in their stride, so far.

terling seems to have found a tentative bottom for the short term in the 1.30 – 1.35 range against the US Dollar, buoyed by the perception that there will be no triggering of the infamous Article 50 for quite some time, perhaps not until 2017.

The Euro appears to have stabilised above 1.10 for now, although we do not expect this support to hold much longer, given the building political risks and the prospect of further ECB easing.

Stock markets worldwide rebounded energetically from their initial post-referendum rout, so much so that the worldwide index had recovered all its post-referendum losses by the weekend.

The performance of emerging market assets was particularly impressive, as nearly every major emerging currency posted sharp gains against the Euro and the US Dollar. The rally was led by the Brazilian Real and the South African Rand, probably the key emerging market trend indicators. It seems like the prospect of never ending monetary stimulus from the Bank of England, the ECB and the Bank of Japan is pushing investors to seek returns wherever bonds still offer significant yields.

In addition to the unpredictable political headlines out of the UK and Brussels, we continue to look for post-referendum sentiment indicators to get a first sense of the macroeconomic fallout. This week will see little activity, with just the Sentix investor sentiment index out in the Eurozone. This typically second tier indicator will certainly have a disproportionate impact this time around.

Major currencies in detail:


Bank of England Governor Carney added fuel to the rally in risk assets after he indicated that a UK rate cut is almost certainly coming in the summer, possibly as early as the July MPC meeting.

He also stated that extraordinary liquidity facilities will be available to banks, as well as a cut in capital requirements for banks, which is intended to spur lending. The announcement knocked Sterling down but it recovered somewhat and is showing signs of finding a bottom at around 1.19 Euros and 1.31 US Dollars.

Markets are likely to look straight through this week’s June PMI business sentiment indices as they do not reflect the referendum surprise. Nothing much will matter until the July sentiment indices are published towards the end of this month.

Until this information is available, expect volatility in Sterling, responding mainly to the EU’s attitude towards the UK’s intended Brexit delay. In this regard, no key announcements are expected until 11 July, when the Eurogroup meets.


As in the UK, little impact is expected from the next macroeconomic releases.

Pre-referendum data has been rendered mostly outdated by the surprise outcome and market turmoil. Currency markets will keep a close watch on any declarations from European leaders and the extent to which the British Government can expect accommodation and patience from its partners.

Another key politico-economic risk is developing around Italian banks. Low profitability caused by ultralax ECB policy and elevated levels of non-performing loans have long cast a cloud over the sector. There is a political fight brewing between the Italian Government and European authorities over a possible state bailout, which is fiercely opposed by the EU. Significant developments are expected this week.


Next Friday’s US payroll report is just about the only piece of macroeconomic information anywhere that is expected to significantly impact currency markets.

After last month’s disappointment, we expect the number to show strength, with close to 200,000 net jobs created in the month of June. This confirmation that the May weakness was just a one-off, should have a modest impact on expectations for future US interest rate hikes.

Markets will also be focused on Fed communications, which are set to be plentiful this week. Dudley speaks on Tuesday, then on Wednesday Tarullo follows up and we get the FOMC minutes later that day.


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