Post-Brexit vote uncertainty casts its shadow over the Fed outlook - Commerzbank

The consequences of the Brexit referendum are keeping the currency market on tenterhooks. Next week, UK politics will deliver initial guidance which is likely to move the pound, said Esther Reichelt , analyst at Commerzbank. According to the analyst, the US labour market report for June will provide an indication about the potential timing for a rate hike to return on the Fed’s agenda and therefore also has the potential to move the dollar.

Key Quotes

“The currency market has weathered the shock about the surprising Brexit vote amazingly well. Following two turbulent days with the pound suffering stronger losses than on “Black Wednesday” 6, global risk sentiment has brightened markedly again: USD/JPY stabilised at a comfortable distance to the 100 mark and EUR/CHF has now even recouped all its losses – presumably with strong support from the Swiss National Bank.”

“The pound looks set to remain under pressure in the foreseeable future. Bank of England governor Mark Carney already signalled further easing of monetary policy as early as in the summer. Moreover, the further roadmap for the UK will remain uncertain for some time. In particular, it is still unclear when the country will officially declare its independence and thus start exit negotiations. What will drive pound valuations in the long run is to what extent the UK will still have access to the single market going forward.”

“A first indication about the direction of negotiations should be available next Tuesday. By then, the members of the Conservative Party will at least have clarity about which two candidates they can choose from as prime ministerial nominees. In the case of candidates that are rather willing to compromise, the pound should recover further. For, the fewer changes appear on the cards in the EU/UK relationship, the better for the pound.”

“Post-Brexit vote uncertainty is also casting its shadow over the Fed outlook. Financial markets have now priced out Fed interest hikes in the foreseeable future, which is currently offset in exchange rates by increased safe-haven USD demand. Yet the market is unlikely to ignore entirely next Friday’s forthcoming June labour market report. Even with near-term Fed rate hikes off the table for now, labour market trends will be a major driver to determine how soon the Fed will see scope for further rate hikes.”