Good morning,
One month to go
With a month to go until the polls open in the EU referendum sterling is starting the week quieter than how it ended. Certainly in the case of GBPUSD the contrasting pushes and pulls of referendum voting and the clear message to markets from the Fed that US rate hikes are around the corner with little preparation has made for interesting watching.
Friday’s news from the polling organisation Yougov that voting sampling changes made by them gave the Leave campaign a lead in both their online and phone polls has taken some of the air out of the Remain camp through the weekend. Betting markets remain quietly confident of a Remain win but regardless of how the vote goes we will be getting further post-mortems on the state of the polling industry.
In the meantime we are into a week of pretty quiet data on the sterling front; a necessary break before what is more than likely to be a very busy June.
Getting ready for June
While the referendum is the most important thing for the UK in June, the Fed meeting on June 15th is the most important thing globally. Last week’s Fed minutes were profoundly hawkish and set up the June meeting as a ‘live’ meeting for a rate increase. That is not to say that the markets have listened; bond and predictions measures are only pricing in a 28% chance of a 25bps hike in 3 weeks’ time but the probabilities attached to hikes by the end of the year is now close on 75%.
It is still my thinking that June is a bit too soon for a rate hike and that the referendum risk may stay the Fed’s hand briefly. A strong wage number in next week’s payrolls report and the decision becomes a lot more difficult. It is also important to remember that while we think that the Federal Reserve is always more likely to raise rates at a meeting that involves a press conference from Janet Yellen, now that the first hike of a normalisation cycle has taken place, the need has lessened dramatically. The chances of a hike in July are nearly double that of June for a reason.
We have three members of the Federal Reserve speaking today which could keep that USD on the front foot.
Greece goes backwards to go forwards
Greece is back in the news following an agreement over the weekend for the nation’s government to impose further backward and regressive fiscal policies; a VAT rate of 24% isn’t going to help spending. While these measures were, in a way, necessary for Greece to receive the next tranche of bailout funding from the European Stability Mechanism they do not answer the most important question which remains around debt relief for the country. There is a meeting on the matter at tomorrow’s Eurogroup get together.
The Day Ahead
Today’s data calendar is packed with European PMI data which will continue the run of weak but positive growth alongside the main issue of poor inflation expectations.
Have a great day.