The single currency regained ground on sterling this week thanks to some rare pro-Brexit sentiment in the UK, but felt the weight of interest rate announcements in the US.
Last Friday the Federal Reserve chairperson, Janet Yellen, made a long-awaited pubic appearance. Investors were eager to hear whether she would endorse the comments made by her colleagues over the previous couple of weeks, pointing to higher interest rates in June or July. She sort of did, confirming that “probably in the coming months such a move would be appropriate”. It was not warning that investors should gird their loins for a rate hike this month but Ms Yellen certainly did not rule out the possibility and her remarks were broadly positive for the dollar.
A previously bullish pound started Tuesday on the back foot, after the latest Daily Telegraph opinion poll revealed the Leave campaign had begun to chip away at the lead gained by their Remain rivals during a recent purple patch. It was put to flight later in the day by another poll, this time in The Guardian, that put the Brexiteers four points ahead of the Bremain camp with a 48%-52% split. A somewhat surprising development given the contrasting outcome of recent polls, the result dented the casual confidence of investors who had come to believe a vote to remain within the EU was a forgone conclusion. Consequently it led investors, who despise uncertainty, to stay away from the pound, which lost around 2% in value against a basket of the most actively traded currencies this week.
Even better than expected UK services PMI data released earlier today – up on the previous month – could do little to wake the pound from its reality check. Under normal circumstances news that manufacturing and construction PMIs – released on Wednesday and Thursday respectively – were largely in line with expectation would have a positive impact on the pound, or prevent a further downtrend at the very least. However, in the current EU referendum focused climate it is clear that Tuesday’s opinion poll is still the limiting factor.
At its (roughly) six-weekly Governing Council meeting on Thursday the European Central Bank made no alteration to monetary policy, other than to say it will now include corporate bonds in its asset purchase programme and to remind investors that interest rates will remain low for a long time. Investors were disappointed that the bank was not more upbeat about its outlook for the Euroland economy and the euro fell after the ECB president’s press conference.
Even so, it was down on the week by only a third of a cent against the US dollar and it gained two cents against sterling, which was weaker on average by -1.
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