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June 2016

Sterling falls again but stabilises

Published: Tuesday 28 June 2016

  • Sterling falls again but stabilises
  • Central banks mull rate cuts

So the English football team misheard what happened on Thursday. "We need to leave Europe", was the message and they obliged. I am a big fan of Iceland and the big clap and chant thing that the team and crowd do together. Brilliant; it's like a football Haka. They had a game plan, had passion and had England looking very very average. Now tell me again, why is football England's national sport?

That was a disappointing distraction to the implosion of the Labour party, the alignment that is taking place for the selection of the new Prime Minister and the uncertainty surrounding the UK's departure from the EU club. S&P downgraded the UK to AA from AAA (sounds like a replacement battery) and Fitch downgraded the UK AA from AA+. That is to be expected in such an unclear situation. It really only affects the UK's ability to borrow at the lowest interest rates but that might be important in the months ahead. Sterling dropped further yesterday amidst all the nervousness and touched lows not seen since the 1980s on some exchange rates. However, it has stabilised a little this morning and looks dramatically oversold in technical terms.
Understandably, the Sterling – Euro exchange rate hasn't fallen as dramatically as others. European leaders are as badly shell shocked by the 'Leave' vote as the UK government was. You only had to see George Osborne's haunted visage to know how badly they have been affected.
The Sterling US Dollar rate seems to have no base but that 'ain't necessarily so', as the song puts it. There is a 30 year trendline that provided support for the Pound yesterday. That was struck at $1.33 and the Pound stopped falling. There is another equally long standing support line at $1.2950, so any further deterioration in the value of the Pound will see that level tested. However, many now believe the US Federal Reserve may reverse its December interest rate hike and keep us interest rates at near 0% for a very extended period in the wake of the Brexit vote. That may have something to do with the Dollar's retreat this morning.
There is other news today away from the Brexit furore; the Reserve Bank of Australia released minutes from their last meeting and there is a lot of consensus that the RBA will cut rates again this year; maybe as soon as August. The strength of the Aussie Dollar is a real concern as is the low inflation and employment market.
In fact many central banks will be reviewing interest rate policy in the wake of the UK's decision because Britain is the 5th largest economy in the world and the EU as a bloc is also affected. Ooooh it's tense. And in the midst of this tension, there are all sorts of undemocratic options being discussed to find ways for the government to avert an actual exit from the EU. When people voted to leave on the basis of the undemocratic nature of the EU commissioners, ignoring a democratic vote does seem a stupid thing to attempt, in my humble opinion. 

Angry wife cure

The Doctor asks, "What’s the problem?"
The man says, "Doctor, I don’t know what to do. Every day my wife seems to lose her temper for no reason. It scares me."
The Doctor says, “I have a technique that will sort that right out. When it seems that your wife is getting angry, just take a glass of water and start swishing it in your mouth. Just swish and swish but don’t swallow it until she either leaves the room or calms down."
Two weeks later the man comes back to the doctor looking fresh and reborn.
The man says, "Doctor that was a brilliant idea. Every time my wife started losing it, I swished with water. I swished and swished, and she calmed right down.  Is that a psychological thing? Is it some kind of neuro-linguistic thing? How the heck does a simple glass of water do that?"
The Doctor says, "The water itself does nothing. It’s keeping your mouth shut that does the trick."

Today's Major Economic Releases 

Market BST Data/Event Previous Expected
EUR Day 1 EU Economic summit    
USD 13:30 US: Final GDP q/q 0.8% 1.0%
USD 13:30 US: Final GDP price index q/q 0.6% 0.6%
USD 15:00 US: CB consumer confidence 92.6 93.2

FX Research by David Johnson

Daily Currency Analysis with Zeta Webber

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