GBP/EUR 1.2520 (0.7985)
The beginning of the week saw markets in nervous territory following weekend news suggesting the Scottish Yes vote gained majority in the independence polls. The reaction across all GBP crosses would suggest that traders had not factored in much probability of a yes vote, and the reaction across global markets, particularly across Europe saw investors and traders alike take steps to protect their risks. The liquidation of GBP holdings saw a huge sell off in GBP crosses, while the FTSE also declines close to .3% with banks and oil and gas leading the decline. The USD has been the primary benefactor of this shift, the USD now appears the most stable of the Major currencies as the Fed look to bring their easing policy to an end. The summer resurgence of the USD has seen it advance over 6.5% and 5% against GBP and JPY respectively, while EURUSD has declined over 8% since May.
GBP was already facing some pressures on the back of easing interest rate expectations however for all intent and purposes it appeared the Scottish independent vote was firmly in the hands of the NO campaign. The last couple of weeks have seen the Yes camp develop momentum and the previously disregarded fundamental risk has now become a very real concern. What opinion polls/surveys suggest and what actually happens at polling stations can be a very different thing in such matters. The Yes vote is almost a movement by this stage and the Sunday independent/yougov report was just one independent poll, but it has certainly resulted in the risk becoming a very real concern.
Headlines on this issue are likely to dominate over the next two weeks as we approach the September 18th polling day. The UK stands to lose approx 10% of its GDP should Scotland gain independence, and while 10% is a large drop to burden the fall out is likely to cast a long shadow. GBP is expected to remain volatile in the meantime, while the shock factor has likely seen more aggressive positioning over the last couple of days it still holds downside potential. Today’s calendar brings with it some of its own risks to GBP, Industrial and manufacturing production data from July, Trade balance data, and the NIESR GDP estimate all cross the wires today. Mark Carney is also speaking in Liverpool this morning, he also has the potential to cause GBP volatility especially if he is questioned on/discusses interest rates of the referendum.
In the background the EUR was performing admirably through yesterday’s session, there was very little data of note and while much of the markets attention was on the UK, the single currency advanced against all major counterparts with the exception of the outperforming USD. EURUSD fell to 14 month lows as momentum favours the greenback and Eurozone investor sentiment surveys suggest the sharpest drop in over three years. This would suggest that yesterday’s bounce in the EUR was more of the dead cat variety, rather than any real turn in EUR sentiment. Data from the Eurozone remains light today and the EUR has already faced selling pressures this morning.
Data from the US session is relatively light today and the greenback continues to draw strength from the Fed winding down QE, and on the whole, better data. The USD traded to 6 year highs against JPY, while we now trade at 14 months lows against the EUR and with GBPUSD now trading at 11 months lows.