Today we have further good news for Sterling, after the BoE released its inflation report. Carney and deputy governor Broadbent reiterated his point regarding a Brexit and the impact it would have on inflation. Despite his comments he made it clear that regardless of the outcome of the referendum, he is confident that inflation figures will return to normal levels.
His comments and specifically his optimism for Inflation rising steadily this year prompted a major perk to Pound Sterling, noticeably against the Euro, US Dollar and Australian Dollar, as well as the Canadian Dollar and Swiss Franc.
Is the referendum responsible for economic slowdown?
It’s difficult at present to determine whether the looming referendum is responsible for economic slowdown, budget cuts, cheaper air fares and Tata Steel’s decision to close its UK plant are all attributing factors that could be responsible for lower inflation expectations.
There is a likely chance that the referendum is playing its part in lower inflation figures, political uncertainty is always a volatile period for an economy and with a decision such as this, businesses could potentially face the brunt of an exit vote.
The EU Polls support a stay vote
Another factor that has supported Sterling strength are the latest referendum polls which show a 20-point lead for the stay vote in some cases, it would appear that the warnings by the likes of Carney, Barack Obama and IMF Chief Christine Lagarde are having an impact on voter’s opinions.
Betting odds of a remain vote have now been cut to 2/9 implying an 82% chance of a remain vote, investor confidence has increased despite poll figures historically being inaccurate, a ‘stay’ vote now on the 23rd of June will most likely equate to further Sterling gains.
Exchange rates for the week ahead
GBPEUR rates are now trading at 1.31, a 3 month high and I expect to remain fairly stable for the remainder of the week. German economic sentiment figures came in much lower than anticipated today despite meeting GDP expectations this morning. Further German data tomorrow morning could strengthen the currency pair.
Germany is the largest economy within the EU and can often create volatility for the single currency, given that there is very little economic data for the Eurozone for the remainder of the week, I expect GBPEUR rates to remain around the 1.30-.31 mark.
GBPUSD rates have increased a cent since the beginning of the trading day peaking at 1.461 prior to the announcement of the new home sale changes, which showed huge improvements on last month’s data.
Most of the US economic releases recently have been positive and I suspect that a rate hike could still be on the table in June. Housing price index figures on Wednesday will likely support positive data off the back of today’s new home sales. However, the durable goods orders which looks at orders over the last 3 years has the potential to move rates significantly, given the large investments that go into these orders.
I am expecting data to be relatively positive for the US and therefore, GBPUSD rates to fall within the 1.44-1.45 range by the end of the trading week.