Good morning

The EU Council meeting concluded with an agreement between the UK and its European partners on a reformed EU, which improves on the terms proposed to the UK in the 2 February draft proposal from EU Council President Donald Tusk. Following the successful meeting, PM Cameron announced that the referendum on the UK’s EU membership will take place on 23 June, as widely expected. With Mayor Johnson opting to join the out campaign, GBP has opened weaker this morning. I will not get into a political debate here, but in my humble opinion Boris has just scored an own goal and we are unlikely to see Boris PM anytime soon. It looks like while the yes camp still holds a lead, in the run up to the referendum you can expect wild moves in the GBP (similar to what we saw during the Scottish referendum. Furthermore, it looks like if the out camp wins the Scots will most probably try and call for another independence referendum. Expect volatility in the GBP therefore to remain with us for the foreseeable future.

Cleveland FED Bank President Mester made optimistic comments on the US economy. She stated that while market volatility poses a risk to the Fed’s moderate growth outlook, she expects the economy to “work through” and “regain its footing.” She pointed to firmness in core inflation as she downplayed worries that falling commodity prices were emblematic of a deflationary trend. The comments help offset St. Louis President Bullard’s Thursday comments that it would be unwise to continue policy normalization. FED president Yellen’s recent comments about rate hikes though makes me think that while other members try to downplay her comments, the reality is the FED will be in no rush to hike rates until the US data has shown to be solid and growing. Right now this is not the case. The USD as a result is likely to trade sideways in a range until such time we hear the FED change their rhetoric.

G20 Finance Minister (FM) and Central Bank (CB) Governors Meeting this week. Markets, however, have become increasingly sceptical of policymakers’ ability to stimulate growth and inflation, particularly with many policy rates already negative. Furthermore, with the prices of oil and food (and commodities in general) falling you wonder how the US, UK and EU can “import” inflation. Perhaps the FM’s and CB’s should accept that rather than try change policy to increase inflation, they should let market forces do it for them. There are perils to trying to force something in that things can go horribly wrong if your policies end up doing the opposite. It is for this reason the ECB have adopted negative rates to name but a few. Banks will no doubt recover their costs through unfavourable offers to their clients, after all someone has to bear the cost.

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