YESTERDAY certainly proved the storm was brewing. I mentioned yesterday my inner thoughts on the UK EU referendum and what would happen should we STAY or GO. Late yesterday afternoon a survey was published showing the REMAIN camp has opened an 18 point lead over the LEAVE camp which immediately saw the GBP rally in the FX market. Spot GBPUSD rallied from circa 1.4425 to over 1.46 at one stage while GBPEUR rallied from 1.28 to trade just shy of 1.30 as I write this comment. That was one heck of a rally and has given the REMAIN camp a real boost. I sincerely hope that survey remains in place ahead of and on the day of the referendum.
In yesterday’s comment I mentioned the FED minutes were being published last night. Some VERY INTERESTING points to be made from the minutes. I wrote yesterday that I was 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. I also mentioned that Chair Yellen has noted several times that the hike is dependent on the “recovery” in the US economy as well as growth in China. Chair Yellen and her colleagues noted it would be appropriate to increase FED funds in June “if incoming data were consistent with economic growth picking up in the second quarter, labour market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective.” FOMC members also noted that the slowdown in the US economy in Q1 was temporary and furthermore they smoothly omitted Chinese growth issues from the statement as those risks have somehow (really?) diminished since their last meeting in March. Perhaps I have been reading different economic data from China J
Suffice to say the market is now pricing in a 32% chance of a hike in June and potentially a double whammy increase in both July and December as well bringing the total rate rises for 2016 to 0.75% and thus taking the FED funds to 1%. As per my comments yesterday, the FED better be wary of a continued slowdown in China so as not to derail the US recovery. I honestly do not see what the big rush is to raise US rates, as I would prefer to see global economies begin to turn together and show healthy gains in GDP. Surely the last thing the FED want is to get to December having hiked to 1% and China’s GDP continues to lag and fall below the psychologically important 7% mark. We know for a fact that corporate investment has fallen in recent months as CEO’s remain cautious on global growth and thus prefer to remain on the sidelines before committing to hiring and investment.
So I continue where I left off yesterday regarding my view on the USD and GBP. I think the USD will continue to rally towards the psychologically 1.10 barrier while the GBP should remain buoyed by the positive outcome in the upcoming referendum. GBPEUR for those travelling to the EU in the summer should therefore continue to rise to that magical 1.35 rate I mentioned yesterday. Here’s hoping!!
Have a good day
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