As forecast the result of Thursday’s Scottish independence referendum was that the land of scotch and bagpipes with remain a part of Team GB. That outcome however was far from certain in the final days of campaigning.
This resulted in significant volatility in Sterling pairs, especially towards the end of the week. GBPUSD has traded in a 1-week range of around 4 cents, while GBPEUR and GBPJPY have experienced ranges of 3.5 and 2.5 big figures respectively.
The news that Scotland will remain in the UK has calmed investors’ immediate fears for the most part and leaves leaving many Sterling pairs in positive territory for the week. However as the trading draws to a close and the euphoria dissipates, a hangover of sorts is starting to set in. This has led many pairs to retrace from their highs earlier in the week.
During the days leading up to the independence vote unionist politicians made many promises of greater powers being passed along to member nations of the UK. There is an element of uncertainty surrounding what this may mean for the UK recovery, and markets have begun to discount that risk. For Example, GBPEUR, which touched a fresh 2-year high this week has retraced nearly a big figure from there. Similarly, GPBUSD has pulled back almost a cent and a half in less than 24 hours as we head into the weekend.
Scotland wasn’t the only noteworthy UK event this week. Inflation results posted a disappointing +1.5%, matching the worst result since 2009 and well below the Bank of England (BoE) target rate of +2.0%. Meanwhile employment statistics, also released this week, showed that the rate of joblessness in the UK dropped to 6.2%, its best outcome since Feb 2009. Alongside the unemployment rate, wages growth numbers were published, printing an anemic +0.6%. This indicates that there is still lots of slack in the British labour sector and takes the pressure off of the BoE on the interest rates front. Financial markets largely ignored this data however, opting rather to focus on the more immediate independence referendum.
Outside of the UK a less dovish (not quite in a place where I’m comfortable using the term ‘Bullish’) than expected Federal Reserve (Fed) monetary policy announcement propelled the Greenback to its highest level since 2010 on a trade weighted basis.
As expected, Fed Chair Janet Yellen announced that a further USD 10-billion will be cut from its monthly QE program. This leaves only USD 15-billion of the once USD 85-billion program remaining and puts the Fed on schedule to shutter it completely in October. On rates Yellen maintained a classic central banker level of ambiguity. She implied that once QE has been wrapped up interests rates will remain at the historical low of 0.25% for a ‘considerable’ period of time. Alongside her comments however the Fed’s economic expectations were published.
Interestingly those projections highlighted that collectively the Fed expects the benchmark rate to be near 1.375% by the end of 2015. This suggests a rather aggressive schedule of interest rate hikes in the back end of 2015. Markets picked up on the steeper forecasted trajectory of rate hikes and have bid into the US Dollar. As the American economy builds sustainable momentum and rates hikes look closer at hand, this story is set to drive not only USD related values, but the broader currency market as a whole.
The British Pound gets a bit of a break in the week ahead as there is no top tier UK data on the calendar. This gives financial markets an opportunity to digest any lingering Scotland related sentiment, without being too concerned with other domestic headlines. Now that much of the uncertainty has been removed and given all of the volatility experienced in these past few weeks we could see a short period of consolidation for Sterling.
With the Scotland vote firmly in the rear view mirror, BoE interest rates are likely to move back into the Spotlight, perhaps putting GBP back on the offensive in the medium term. However, as mentioned above, potentially weighing on Sterling going forward is nervousness about the promises of a de-centralisation of powers in the UK. Though the impact of power-distribution uncertainty will likely ride in the passenger seat while monetary policy related factors drive.
It isn’t a particularly busy data calendar in the week ahead, however those events most likely to move markets are all Eurozone based. Monday sees European Central Bank (ECB) President Mario Draghi testify on the state of monetary policy to EU parliament in Brussels. Inevitably there will be lots of questions about the ECB’s planned QE program and how it might combat persistent dis-inflationary pressures. Draghi might also use the venue to remind policy makers that there are limitations to what the ECB can do to protect the economy, and that regional governments must do more. As deposit rates in the EU have moved into negative territory this is a point that Draghi has become increasingly vocal about.
Purchasing Managers Index (PMI) survey results are on the docket also. In which decision makers from the Manufacturing and Services sectors across the EU comment on the business climate they face. Recent results have not been inspiring, especially in France where the outcome has regularly been less than the crucial 50.0 level. A result above 50.0 suggests that the industry is in a state of expansion, while a reading below indicates contraction. Even the German numbers have been discouraging, trending consistently lower through most of 2014. With pre-existing negative sentiment in the common currency, soft PMI results are a significant event risk for Euro.
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