Stability with Scars

Relative stability has returned to markets, but the scar left by last week’s Brexit vote still runs deep, most notably on sterling, but also on stock markets and also to a degree the single currency itself. The lasting impact is also seen on interest rate expectations, with interest rate markets now suggesting the next UK move will be for lower rates in the UK, with a small risk of this also being priced into the US markets. In the UK, the standoff between the UK and Europe remains deep, as was evident at yesterday’s summit of EU leaders. Europe wants the UK to formally trigger the process to leave (Article 50), whereas the UK wants to have a new prime minister in place first, which now appears to have been accepted. But even after that, there are legal and constitutional hurdles to be overcome. The leadership contest for the next leader of the Conservative Party starts today.

Looking across the more settled currency markets, we see USDJPY remaining above the 100 level, which to a degree removes some pressure from the BoJ and MoF with respect to the currency. The SNB can also take some comfort from the reversal in EURCHF, which has unwound most of the down-move seen in the wake of the referendum result last week. Meanwhile, the single currency retains a softer stance in the wake of last week’s events, only sterling and the Swiss franc softer on the majors since just before the vote. Clearly, there are concerns that this has undermined the fabric of the European Union (and hence the euro) itself, but on that front it remains early days.

Did you know?

The GBP/USD pair is widely referred to as “cable”. The term dates back to the 19th century, during which the exchange rate between the U.S. dollar and the British Pound was transmitted across the Atlantic via a huge cable that ran across the ocean floor and connected the two countries.

Word of the day
"Narrow Market" - Describes a situation in which a currency pair receives relatively few bid and ask offers. A Narrow Market is also known as a Thin Market.
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