The pound fell to two month lows against the dollar on Monday and hit multi-year lows against the yen as worries over a U.K. referendum took hold. Sterling has sold off in recent sessions amid fears that a U.K. exit could trigger a period of uncertainty in financial markets and hit growth in the region. The latest ‘poll of polls’ shows voters are evenly split. The day after the referendum, the pound will either sink to the lowest level in more than 30 years or climb to the highest this year.
U.K’s 10-year bond yields fell 2.6 basis points, or 2.11%, to trade at 1.209% after hitting an all-time low late last week, amid growing anxiety over Berxit leaving investors scrambling for safe haven assets. Despite economic data proving to be dependant on the impending referendum, the consumer price index released on Tuesday came out slightly worse than expected at 0.3%. Furthermore, the Office for National Statistics released Producer Price Index figures for May which shows an increase of 2.6% against a forecasted 0.9%.
On Thursday morning, the unemployment rate which fell to its lowest level since October 2005, dropping .1 percent to 5.0%.
Also on Thursday, the Bank of England voted 0-0-9 to keep interest rates unchanged at a record low of 0.5%. Warning that uncertainty about the referendum is the "largest immediate risk" facing global financial markets; the Bank warned of "risks of adverse spill-overs to the global economy”, stating that it was "increasingly likely" that sterling would fall further if vote leave succeeds. The MPC said there was growing evidence that UK businesses and consumers were putting off "major economic decisions" until after the referendum, with real estate and car purchases delayed, along with business investments. A vote to leave would also mean that interest rates would probably stay on hold for some time where a remain vote would once again open the door for a rate hike in 2017.
Sterling ended the week on a high following the murder of pro-European Union MP Jo Cox, as both in and out camps suspended their campaigns. The probability of a remain vote rose to 67% on Friday after falling to a 60% low early on Thursday. The markets perception of Brexit probabilities may have been reduced as a result of the incidents on Thursday, however this will have a limited impact or sustainability unless followed through by polls released in coming days. Traders are indicating volumes have fallen with many investors trying to close out their positions that were placed on a weaker pound in a bid to limit their exposure to an instantaneous 10-15 percent jump after a remain vote.
Japanese retail investors, collectively nicknamed Mrs Watanabe are said to be building huge positions in GBP as the sterling is currently quite cheap.As polls close at 10pm, Japanese investors will be amongst the first to react to the result on Friday and set the tone for other markets to follow; Mrs.Wantanabe’s sell offs could add fuel to the fire on the expected volatility on Friday morning.
Europe's largest economy, Germany saw it’s 10-year government bond fall below zero for the first time since records began as investors seek safe haven assets. Germany is now seen as a safe haven along with the likes of Switzerland and Japan. This impact could be from ECB’s policy of negative interest rates and asset purchasing program, a global slowdown and the UK’s Brexit. Talking points at the EcoFin meeting on Friday included the status of the EU and the Brexit threat. German finance minister Wolfgang Schaeuble made an impassioned plea for a stronger European Union, while Britain was not directly mentioned, he said ‘no country in Europe would cope with the challenges of the 21st century on its own’.
The markets have reacted to the next rate hike by the U.S. central bank after disappointing employment report in May, showing the slowest rate of jobs growth since September 2010. Despite this retail sales have proved to be very positive. In April, sales grew 1.3%, the biggest gain in a year. Figures show during the month of May sales increased by more than 0.5%; indicating consumer spending will help with economic growth in the second quarter of 2016. The US kept interest rates unchanged as expected following a poor jobs figure early this month. The Federal Reserve still plans for two hikes this year, although six of the Fed’s 17 individual forecasts projected just one hike this year.
The US central bank also lowered its economic growth forecasts for 2016-2017 to 2.0% growth from 2.2% perviously indicated. Fed Chair Janet Yellen also spoke about UK’s referendum saying “It is a decision that could have consequences for economic and financial conditions in global markets, in turn for the US economic outlook that would be a factor in deciding on the appropriate path of policy.” U.S. consumer prices moderated in May, but sustained increases in housing and health care costs kept underlying inflation supported, which could allow the Federal Reserve to raise interest rates this year. Claims for state unemployment benefits for the week ending 11th June saw it increase from 13,000 to 277,000. With the claims under 300,000 for 67 consecutive weeks indicating a strong job market.