Sterling feeling the strain

2 June, 2016

Simon Eastman

Yesterday we had another day of sterling losses as the momentum for selling gained, after the most recent referendum poll.

Tuesday saw traders back from the spring Bank Holiday and straight into a new poll on the EU referendum, with the Guardian and ICM polls both showing a swing towards the Leave Campaign. The previous Stay margin of 18 percent, had swung to a 4 percent Leave victory at 52 v 48. This led to a sharp drop in the value of sterling as it lost against all major currencies and as of yesterday, following a further drop had lost 3 cents against the Euro and 3.5 cents against the US dollar.

After the poll we saw a significant reading in what is known as “Implied Volatility”. This is basically a measure of expected future stress on the pound and the current level hasn’t been this high since February 2009 as the global economic meltdown was in full swing. This is clearly not a good sign and will most likely see UK stocks and the currency market come under increased pressure over the next few weeks and beyond as the all important vote looms.

We did see some data releases yesterday with German and EU manufacturing PMI, which hit expectations for the EU as a whole, but Germany fell just below. The U.K. was half a point above forecast but with focus elsewhere investors took little notice. UK consumer credit, mortgage approvals and money supply all fell short adding to the pounds woes. As the US opened and the ecostats flowed the dollar rallied further with positive PMI although having gained so much we did see it plateau as key resistance floors were hit.

So onto Thursday and will sentiment be led by new polls or will the data releases have any bearing on the rates? We have construction PMI today from the UK and PPI fro the EU, although focus will be on the ECB meeting at lunchtime. No change is expected so the markets will be awaiting the press conference a little later at 1.30pm, which will overlap with a speech from Bank of England governor Mark Carney who with recent revelations towards public opinion on the vote, will undoubtedly use his airtime to make his views heard.

Key events today along with string investor sentiment should provide some volatile trading conditions. If you have a transfer to make, give one of the CI team a call at your earliest convenience to discuss your options and make the most ailing Pound.