Sterling felt the weight of several EU referendum opinion polls released over the weekend: both indicating the Leave campaign has nudged into the lead ahead of the 23 June vote. A YouGov poll for ITV placed Leave ahead on 45 to 41 per cent, while a new poll by Opinium for The Observer showed the Leave camp has a three point lead on 43 to 40 per cent.
In terms of the pounds relationship with the single currency, this Brexit friendly data served to squeeze the GBP/EUR rate down by 0.7% to 1.26 on Monday. A significant development when we consider the rate was above 1.31 towards the end of May.
The Federal Reserve chairperson’s speech on Monday evening went very much as expected. Janet Yellen conceded that last week’s soft payrolls data were “disappointing” and failed to reiterate her expectation of higher interest rates “in the coming months”. So there will be no increase this month. Ms Yellen’s caution came as no surprise and had little effect on the US dollar.
Wednesday’s gross domestic product data put Euroland ahead of the States and Britain in the growth stakes. While the economy of the UK expanded by 0.4% in the first quarter, and that of the US by 0.2%, the euro zone expanded by 0.6%. The GDP figures – the week’s only top-tier €Z ecostats – helped explain why the euro was able to add one and a half US cents and to strengthen by a cent and a quarter against the pound over the week.
It was not exactly a triumph for the euro though. It was flattered by the weakness of the pound and the dollar; against all the other major currencies it was lower. The dollar’s problem was a disappointing set of US employment data, which dashed hopes of an interest rate increase this month. Sterling’s handicap was – and remains – the upcoming referendum on Britain’s EU membership.
Under normal circumstances the wave of positive UK economic data released this week would have lent considerable support to the pound:
• Halifax House Price Index 0.6% vs. 0.3% forecast (Tuesday)
• Manufacturing m/m 2.3% vs. 0.0% forecast (Wednesday),
• Industrial Production m/m 2.0% vs. 0.0% forecast (Wednesday)
• NIESR GDP Estimate 0.5% up from 0.4% (Wednesday)
• Goods Trade Balance -10.5B vs. -11.1B forecast (Thursday)
• Construction Output m/m 2.5% vs. 1.5% forecast (Friday)
What’s more, the result of the latest Bank of England survey released on Friday indicates more British people think the central bank will raise interest rates over the next year than three months ago, as they see inflation picking up.
However, this positive outlook for the UK economy was emphatically undermined by the ongoing uncertainty surrounding the EU referendum, following the Leave friendly opinion polls the previous weekend. With investors wary of life outside of the EU, such pro-Brexit sentiment has caused them to take flight from the pound in favour of the euro.
European Central Bank President Mario Draghi urged European governments to play their part in boosting growth and inflation in the region, warning that a lack of economic reforms is making the ECB’s job harder. The ECB has unleashed a sweeping range of stimulus measures in recent years, from negative interest rates to more than a trillion euros of bond purchases. But inflation remains far short of the central bank’s target of just below 2%, coming in at minus 0.1% last month.
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