‘Brexit' fears haunt pound while Fed speakers wrong-foot dollar bears

Strangely enough from a financial markets’ viewpoint, the biggest loser from the Brussels terrorist attacks was the British pound. The attacks made ‘Brexit’ more likely according to analysts, as British voters might seek to distance themselves from the European Union and the terrorist attacks that took place first in Paris back in November last year and now in Brussels. Immigration is a key issue in the referendum. Furthermore, the resignation of a senior minister from David Cameron’s government during the previous weekend and the publication of some polls that showed the ‘leave’ campaign doing well, spooked those betting on sterling’s recovery from the lows it had hit back in late February.

Sterling was looking to challenge the 1.40 level versus the US dollar after briefly topping 1.45 on March 18, before the Eurosceptic senior minister’s resignation decision was made public. Of course a rally in the US dollar also played a role in cable’s decline, but the euro also made gains versus the UK currency.

It was fairly safe to predict that there will be a lot of volatility in the run-up to the UK’s referendum to remain or leave the European Union. However, as the call appears to be a close one, this has meant quite a roller-coaster ride for the UK currency. It is very possible that the next three months until the referendum on June 23 will be as volatile if not more, and investors and traders should brace themselves.

With respect to the eventual outcome, it appears that the ‘remain’ campaign ultimately prevailing is still the main scenario. The ‘leave’ campaign is probably more vocal and more passionate and emotional. It remains to be seen however whether the emotional aspect of ‘leave’ will be enough to overpower any concerns about the potential negative economic impact of ‘Brexit’ – especially on economic growth and employment. Strangely the market itself might become a factor in the referendum as a plunge in the pound could convince some voters that the economic impact from ‘Brexit’ is not just a theoretical argument of the ‘stay’ campaign’s rhetoric. It will certainly be interesting to check if cable goes on to test 1.3860 (the late February low), while euro / pound has already broken through to a new 15-month high above 79 pence and is looking to test the 80 pence level.

While the prevailing sentiment is quite negative against the pound, one should also keep in mind that if positive news for the pound emerges, it can lead to some violent moves in the other direction as many speculative positions might be quickly unwound.

Fed speakers: clarifying issue or sowing confusion?

The other key feature of the holiday-shortened week was the more-hawkish-than-expected tone by Fed officials in speeches or media appearances. Fed regional Presidents such as Bullard, Harker and Evans, appeared more willing to endorse rate hikes than was the impression following the previous week’s Fed meeting and press conference by Janet Yellen. This could have been an attempt by the Fed to bring markets back into some balance with respect to rate hike expectations, as the original takeaway that the Fed was safely out of the picture for the next few months, might not have been the message the committee wanted to send.

Alternatively, since there were no speeches or appearances by the key ‘triad’ of Fed officials; Chair Yellen, Vice-President Fischer and New York Fed President Dudley, the other officials were mostly expressing their own opinions and not necessarily how the FOMC might decide if a rate hike vote was brought in front of them. The Fed speakers therefore were successful in sparking some new speculation about the appropriate number of rate hikes this year and injecting some uncertainty about a possible hike in the June or even the April meetings. This caused the dollar to gain, but the overall picture – as well as recent trading ranges between the greenback and the euro and the yen – remained essentially unchanged.