Undecided Could Swing the Final Brexit Referendum Outcome
The June Federal Open Market Committee (FOMC) statement brought no surprises after the Non Farm Payrolls miss changed market expectations. The U.S. benchmark interest rate remains unchanged at 0.50 percent. The economic projections were lower than in January and the dot-plot showed one Fed member is only forecasting 1 rate hike in 2016 and none in 2017. St. Louis Fed President Jim Bullard is the most likely to have made those predictions after his comments on Friday. The voting member of the FOMC said that there is a mismatch between Fed and investor expectations for the fed funds rate and it is eroding the central bank’s credibility. Fed Chair Yellen will testify next week on Tuesday, June 21 at 10:00 am EDT before a Senate committee and on Wednesday, June 22 at 10:00 am EDT before a U.S. Congress Committee. The USD has been supported by risk aversion as the Brexit vote looms, but has gotten no support from the U.S. central bank statement or Bullard’s comments to the press.
The tragic death of British MP Jo Cox brought a suspension to both sides of the Europe membership referendum. The Leave camp had been rising in polls that put them ahead in some instances. Bookmakers still had the Remain camp at the lead, but it had been cut considerably to 60 to 40 percent, when it was more than 80 percent to Stay only a couple of months ago. The suspension in the campaign and the shooting could force the undecided vote to pick a side which will be shown in polls to be released this week. The Bank of England (BoE) held rates unchanged and issued a stern warning about Brexit. According to the BoE Governor Mark Carney the Brexit is the most significant risk facing the United Kingdom. The UK Referendum vote will take place on Thursday, June 23 starting at 2:00 am until 5:00 pm EDT. Results are expected on Friday morning.
Uncertainty about the Fed and Brexit outcomes has made the yen one of the best performing currencies to the dismay of Japanese officials. The Bank of Japan stood pat on rates and quantitative easing on Thursday and with less than expected dovish rhetoric gave a boost to the currency. The JPY has become a safe haven for investors that wish to limit their exposure to what could be a negative outcome for the EUR and GBP.
The EUR/USD saw a lot of volatility during the past 5 days with a 1.54 percent gap between the high and the low, but in the end the price ended up close to where it began at 1.1279 (a 0.08 percent gain). There were few surprises from central banks that for the most part stuck to their anticipated announcements. The Fed held rates and provided little clues on its future benchmark rate plans. Every meeting is a live one, until it isn’t. July is next in the calendar, but the FOMC has no press conference which would leave September that due to its proximity to the U.S. presidential elections and the Fed’s own cautious attitude is unlikely to be the meeting that sees a follow up to the December 2015 rate hike. So its is once again the December FOMC that is selected to unveil a higher American interest rate.
Brexit Outcome Could Reshape Europe
The EUR/GBP has gained 0.20 percent since June 10. The pair is trading at 0.7877. The high of the week came at 0.7995 a couple of hours after the Bank of England had released its rate statement and comments on Brexit. After the news of MP Cox’s shooting and the suspension of the referendum the GBP regained some ground and managed to trader under the 0.79 price level.
The rise of the Leave camp triggered risk aversion in the market as the levels of uncertainty are at the highest since the beginning of the referendum process. It is becoming hard to price the information as it is up to the undecided voters to make up their minds and vote accordingly. The economics of the referendum favor the Stay camp, but the debate has centered on the social and political aspect of European membership which have put Leave ahead until before the MP shooting. A Brexit could be the beginning of the end for the European Union and could have collateral damage on Spanish elections on Sunday, June 26. The GBP would be immediately impacted and would suffer a dramatic depreciation. A Stay win on the EU membership referendum would ease investor minds and relax risk aversion with the GBP and markets bouncing back from the Brexit anxiety if there is a no Brexit outcome.
Market events to watch this week:
Monday, June 20
9:30pm AUD Monetary Policy Meeting Minutes
Tuesday, June 21
Tentative EUR German Constitutional Court Ruling
5:00am EUR German ZEW Economic Sentiment
10:00am USD Fed Chair Yellen Testifies
Wednesday, June 22
8:30am CAD Core Retail Sales m/m
10:00am USD Fed Chair Yellen Testifies
10:30am USD Crude Oil Inventories
Thursday, June 23
ALL DAY UK EU Referendum
8:30am USD Unemployment Claims
Friday, June 24
UK Referendum Results
4:00am EUR German Ifo Business Climate
8:30am USD Core Durable Goods Orders m/m