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May 2016

Sterling slips again on Brexit fears

Published: Monday 23 May 2016

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  • Sterling slips again on Brexit fears
  • Japan trade surplus improves but activity still declines
     
After a week in which the Pound rallied following a poll which suggested the UK would not exit the EU, the weekend brought all manners of pro and anti EU comments. The Cameron/ Osborne faction (I am so surprised the press aren't calling them Cam-borne these days) are telling us Britain will fall into an abyss if the vote is to leave whilst David Cameron's right hand guru, Steve Hilton tells us that the UK is not governable by the UK parliament all the time as Britain remains a member of the EU. Sterling gave up some of its gains in the latter part of the week and it is level but twitchy this morning ahead of a week which is light on data but is undoubtedly going to be heavy on opinion. That said, the 2nd assessment of UK economic growth data could disappoint on Thursday. The forecasters have assumed there will be no change to the 1st estimate of 2.1% annualized growth but recent data would suggest that may be overstated. So beware of weakness in the Pound around that news.
 
The week started with trade data from Japan. Imports were down 23.3% on the year to April and exports were down 10.1% in the same period but the monthly figures showed a trade surplus and that was seized upon by traders who strengthened the Yen in early trading.
 
For the week ahead, we need to watch out for UK government borrowing data tomorrow, New Zealand's trade balance data overnight into Wednesday, Canada's interest rate decision on Wednesday and the German IFO business sentiment indices the same day. US durable orders data should reflect a continued slowdown on Thursday and the US GDP data is due on Friday and that may well show a slight improvement on the 1st estimate. That showed 1.9% growth on the year but the current forecasts suggest this will be improved to 2.1%. The Dollar will strengthen if that is so.
 
In addition, there is a lot of talk about investors and traders bracing themselves for a very eventful June. The US Federal Reserve is felt to be ready to raise their base rate and many members of the Feb Open Market Committee are voicing their support for such a move. So whilst the US Dollar has been weaker in the past few days, there is plenty of scope for it to strengthen as we approach their June 14th meeting. 
 
Sterling is bound to be volatile in the run up to the 23rd June referendum on EU membership and so will the Euro. Whilst the UK isn't a member of the single currency bloc, it is one of the few net contributors to the EU budget, so an exit will have consequences for the EU as a hole and the Euro users as well. These two factors will not be alone in moving the markets but they will dominate. In this kind of turmoil, adopting the Boy Scout approach and 'being prepared' is the best option.
 
And I wasn't aware until today of this new conspiracy theory regarding the trails left by high flying jets. Apparently, these are seen by some as evidence of mind altering drugs being sprayed high into the atmosphere to keep us all happy and malleable. Others are convinced that these are streams of chemicals designed to control the climate. I am a bit old school on this, I think they are water vapour emerging from Jet engines but I could be wrong.
 

New medication

 
Bill, the farmer bought a new bull but a week later he complained to the vet that "all that damned bull does is eat grass and sleep. He won't even look at the cows."
 
The vet prescribes some pills which are to be sneaked into the bulls hard feed.
 
A fortnight later, the farmer is in the pub with some of his friends. "How's your bull getting on with that new medicine?" says one farmer friend.
 
"It’s been amazing," says Bill. "He serviced all the cows on my farm and then he leapt over the fence into Jack's top field and serviced all of his girls and then I found him in with Michael's herd the next day. He was really hard to catch but we finally got him back to the barn and I've had to keep him in. It certainly worked. He's like a mating machine."
 
"Crikey," says Charlie. "What's the medicine called?"
 
"Can't remember," Says Bill, "but it tastes like liquorice." 
 

Today's Major Economic Releases 

 
Market BST Data/Event Previous Expected
EUR 09:00 EU: Flash manufacturing PMI 51.7 51.9
EUR 09:00 EU: Flash services PMI 53.1 53.3
USD 15:00 US: Flash manufacturing PMI 50.8 51.0
EUR 15:00 EU: Consumer confidence -9 -9

Daily Currency Insight by David Johnson

Daily Currency Analysis with Michael Hart

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