CALM BEFORE THE STORM. The “mighty” Pound continues to trade sideways with both the REMAIN and LEAVE (the EU) camps pitching the pro’s and con’s. While there are arguments to be had in favour and against each camp, the facts are simply undeniable. Remaining IN the EU offers the UK access to over 500 mio people and the ability to export and import freely. The UK economy is dependent on this trade and should the UK electorate decide to LEAVE and go it alone, be rest assured, financially we will be worse off. The IMF, BoE, World Bank, FED, ECB and even the US President cannot all be wrong. Should the UK leave the EU, prices will rise just like it happened when the EUR was born. I remember clearly travelling throughout Europe on business trips the costs of a simple cup of coffee. Prices rose by 10-20% as companies hid the increases when the EUR currency was adopted. Wages on the other hand remained static. As I have written and noted previously, should the UK leave the EU, the GBP will devalue by 15-20% and with it you will see local products that have foreign (imported) parts rise the same. Wages on the other hand will not rise by the same amount and therefore (you do the maths) your basic income will fall by the same amount. Is that the legacy you want to leave for your kids? I think not. In fact today sees the publication of Average Earnings and the statisticians/economists are calling for a rise of 1.7% (below the 1.8% printed last month). In other words wages are rising at a slower pace than the impact of a potentially depreciating Pound. Yesterday we saw UK CPI published with YoY at 0.30% (0.50% last print) and MoM 0.10% from 0.40%. Inflation is therefore not rising as the BoE have indicated and with Wage growth also stagnant UK rates will continue to be pegged at 0.50% for the time being. Heaven only knows how the BoE will react should the UK vote to Leave….
US data has shown some signs of life after yesterday’s CPI saw Core CPI YoY flat at 2.1% and an increase MoM to 0.20%. The CPI number comes on the back of other positive US economic data with increases in retails sales, consumer confidence, housing starts and industrial production. This leaves GDP for the US pegged at between 2.75-3.00% for 2016. FED rate hikes are now pricing in a 15% hike in June and 33% hike in July. Later today the FED minutes will be published and this will give us an indication on how FOMC members voted last time round. I am still of the opinion that the FED will be looking to hike at the latest (if at all) in July given the US elections in November. However and I have said this many times, Pres of the FED Yellen, has said many times the FED rate hike decision is dependent on (not only) US economic data, but also (and as important) Chinese (and to a lesser extent EU/UK) growth. With the latter (China, EU, UK) all showing signs are lower growth the FED will have to find solid reasons to hike. The US economy has not shown signs are exceptional growth, and it is for this reason I truly believe the FED will hold back until after the elections to hike. What’s the big rush!!!
So what are my thoughts going forward…well as far as the USD is concerned I think the recent fall has hit the brakes and it looks like FX traders are betting the USD will begin some form of rally from here. Already the EURUSD has fallen back to trade sub 1.13 handle and from the look of it there is more to come and I would not be surprised to see a rally towards 1.10 over the coming week(s).
As for the GBP, well that is pretty simple. As we get closer to 23 June referendum, volatility will increase and you are likely to see large daily moves as rumours (and some facts) make the headlines. I think we will vote to STAY and therefore I will be looking for the GBP to trade stronger on the back of this. Same applies to GBPEUR, a move from 1.2750 to 1.3500 in not going to surprise me.
Good luck and go well
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