market attention last week was occupied by the UK’s EU Referendum as investors closely watched polls and betting odds for signals as to the likely outcome of the vote. The pound appreciated mid-week as polls indicated a lead for Remain heading into voting day, only to depreciate sharply as the results started coming in and Leave took the lead. The pound, financial markets, oil, and the euro fell overnight, while demand rose for traditional safe havens, including the yen, US dollar, and gold. Sterling then pared losses, stabilising heading into the afternoon. This week, markets will continue to digest the implications of the Referendum results, including a possible second Scottish Referendum on leaving the UK. Ongoing uncertainty may continue to weigh on both the pound and financial markets and may cause additional volatility. Highlights of the week’s economic calendar include the UK’s Current Account, final Q1 GDP figures from the UK and the US, and initial June Eurozone CPI.
Sterling strengthened heading into Referendum day as polls showed Remain in the lead, including an Ipsos Mori poll that indicated support for Remain at 52% and Leave at 48%. Sterling peaked above 1.5000 on Thursday evening on expectations that the UK would vote to stay in the EU, and initial results from Gibraltar indicated a strong lead for Remain. Leave then took the lead, winning the Referendum at 51.9% compared to 48.1% for Remain. The pound plummeted overnight, falling to new lows against the euro and the dollar. Sterling-euro fell to a two-year low against the euro around 1.2028, while pound-dollar fell to around 1.3229, its lowest levels since 1985, a drop of nearly 12%, before paring losses Friday morning. The FTSE 100 fell 3% while the more domestically focused FTSE 250 fell 7%. Prime Minister David Cameron announced on Friday that he would be resigning by October. The Bank of England said it would make at least £250B available to banks and could adjust monetary policy if needed, helping to calm markets. The economic calendar was otherwise relatively quiet last week. Releases out earlier in the week included a 0.8% gain in the Rightmove Housing Price Index and slightly lower-than-expected Public Sector Net Borrowing at 9.1B.
The pound’s strength this week will largely be driven by politics as markets continue to digest the implications of a vote to leave the EU, including a possible second Scottish Referendum on leaving the UK. Ongoing Brexit uncertainty may continue to put downwards pressure on the pound, particularly if the contagion looks likely to spread to other EU countries, increasing market uncertainty. With the process of leaving the EU expected to take at least two years and unlikely to begin in earnest until a new prime minister is announced, uncertainty over the implications of a Brexit is likely to continue for some time. Economic releases out from the UK this week include Net Lending to Individuals, Current Account, Final Q1 GDP, and Manufacturing PMI. The UK’s Current Account deficit will be closely watched, particularly in light of the decision to leave the UK. Final estimates are expected to confirm Q1 GDP growth of 0.4%, while Manufacturing PMI may tick up slightly from 50.1 to 50.2.
The German high court ruled that the ECB’s Outright Money Transactions programme is constitutional, supporting the euro. Economic Sentiment unexpectedly improved in both Germany and the Eurozone as a whole in June. The German index rose from 6.4 to 19.2, the highest since August 2015, while the Eurozone index rose from 16.8 to 20.2, the highest since April. ECB President Draghi spoke on Tuesday ahead of the UK’s EU Referendum, discussing the inflation outlook, and reiterated that the ECB had prepared for all possible outcomes of the referendum. Flash Manufacturing and Services PMI figures, out Thursday morning, were mixed and had limited impact in light of market attention on the day’s referendum. French, German, and Eurozone Services PMI fell more than expected, while both French Services and Manufacturing PMI were below the key 50 mark, indicating industry contraction. On the other hand, Manufacturing PMI releases surprised to the upside in both Germany and the Eurozone. German Business Climate rose more than expected from 107.8 to 108.7. LTRO?
Signs that contagion from the UK’s vote to leave the EU may spread to other EU countries could put renewed pressure on the euro. Ongoing uncertainty around the implementation of a Brexit may be one of the main driving factors of the euro’s strength this week. Comments from ECB President Draghi, who is giving the opening remarks at the European Central Bank Forum, will be closely watched for any discussion of the inflation outlook or the ECB’s outlook following the UK’s vote to leave the EU. The main release of the week will likely be Thursday’s Flash Estimate of annual CPI inflation in June. Headline inflation is forecast to inch up to 0.0% from -0.1% in May, while core inflation is expected to remain unchanged at 0.8% compared to a year prior. A slight gain in inflation could offer the euro some support, although inflation remains well below the 2% target rate and thus a risk to the euro’s strength. Other releases markets will be keeping an eye on include German Retail Sales, German Unemployment Change, the ECB’s Monetary Policy Meeting Accounts, and the Eurozone’s Unemployment Rate.
Last week, the dollar strengthened against both the pound and the euro as a safe haven as the UK voted to leave the EU. Sterling-dollar dropped below 1.3300 to its lowest levels since 1985, while euro-dollar fell below 1.1000 for the first time since March. Earlier in the week, Fed Chair Yellen testified on the Semiannual Monetary Policy Report, leaving the door open for gradually raising interest rates depending on data and global factors, such as the UK’s EU Referendum, and again not specifying the timeline in which the next hike might occur. Existing Home Sales rose to an annualised 5.53M, while New Home Sales fell to an annualised 551K. Unemployment Claims fell more than expected to 259K from 277K. Durable Goods Orders contracted 2.2%, more than expected, while Core Durable Goods Orders unexpectedly fell 0.3%.
Continued Brexit uncertainty could lead to further demand for the dollar as a safe haven this week, while any improvement in risk sentiment could ease some of the demand for safe havens. This week’s economic calendar includes Final Q1 GDP, which is expected to see an upwards revision from 0.8% to 1.0% and may offer the dollar support. Consumer Confidence is forecast to have increased in June. Chicago PMI and ISM Manufacturing PMI are also forecast to increase, while the Core PCE Price Index is expected to remain unchanged at 0.2% and Personal Spending growth to slow to 0.3% from 1.0% the previous month. Pending Home Sales are forecast to decline 0.9% having previously risen 5.1%. The Fed releases the results of its Bank Stress Test on Wednesday, which will be closely watched following last week’s Brexit vote and its implications for global financial markets. A vote for Brexit and last week’s disappointing Durable Goods Orders may push back expectations of a Fed rate hike, and markets will continue to watch Fed comments closely for any guidance on the outlook for interest rates.