Markets in June were dominated by the approach of the UK EU referendum on June 23 and the sharp reaction to the vote to leave. While there will be more focus on other things in July, market movements are still likely to be dominated by the aftermath of the UK vote for “Brexit”, mainly because the market reactions to the vote were so sharp and large.
Main market movements in June
- GBP/USD fell 18 figures to 1.32 – the lowest level since 1985 – in the immediate reaction to the UK referendum vote on June 23, after rising above 1.50 to the highest level this year ahead of the poll in anticipation of a “Remain vote”.
- The USD generally suffered in the early part of the month from declining expectations of a Fed rate hike following weak employment data and a more dovish Fed statement on June 15, but recovered strongly on flight to quality after the UK Brexit vote
- The JPY was the strongest major currency in June, initially gaining because of declining expectations of Fed tightening, and subsequently gaining on risk aversion following the UK vote. GBP/JPY fell 18% from the June 1 high to the June 24 low, and USD/JPY fell from above 110 on June 1 to trade briefly below 100 on June 24 before making a modest recovery.
- EUR/USD was dragged lower by GBP/USD after the Brexit vote, with UK exit from the EU seen as bad news for the Eurozone economy as well as the UK economy. Other risk sensitive currencies also fell back against the USD and JPY. However, risk appetite has recovered since the vote, and EUR/USD actually finished little changed on the month in June because of early USD weakness in the month.
Outlook for July – key issues
Brexit vote aftermath
- Key upcoming event: Bank of England meeting on July 14th.
- GBP to stay weak and GBP/USD likely to make new lows below 1.30 especially if the Bank of England cuts rates. Short term corrective potential exists, especially in a more positive equity market environment, but GBP/USD likely to remain well below 1.40.
- Potential for correction of JPY strength and commodity currency weakness on equity recovery, but any recoveries likely to be cautious until there is clearer data on the economic impact of the Brexit decision.
- Click here for our full commentary on the Brexit vote aftermath
The FOMC and the US employment report
- Key events – US employment Report July 8th ; FOMC meeting July 26/27
- US employment report could be key for risk appetite after weak May report. Another weak report would undermine confidence and likely lead to a further sell off in risky assets
- FOMC are unlikely to raise rate in July even though the majority of FOMC members saw two more rate hikes this year at the June meeting. Brexit uncertainty suggests delay
- USD likely to suffer if data is weak, particularly against the JPY.
- Click here for our full commentary on the FOMC and US employment report
- Perhaps the biggest risk coming out of the UK decision to leave is not so much the direct economic implications for the UK as the political risks for Europe
- Many fear that the UK decision to leave could mean increased support for anti-EU and other populist parties elsewhere in the EU, (though the latest Spanish election results showed a shift towards the status quo)
- While there are no more significant European elections scheduled until 2017, there will be interest in any evidence of support for exit campaigns elsewhere in Europe, and any such support could be expected to be seen as negative for the EUR
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