Daily Market Digest: GBP maintains gains as Brexit sentiment improves

The sterling gapped higher on Monday on new opinion polls putting the ‘Remain’ camp in the lead. GBPUSD continued to inch higher through the day, although the markets were very mixed, with EURUSD giving up part of its gains. Economic calendar today remains light on news.

Today’s Economic events

• UK Rightmove HPI m/m 0.80% vs. 0.40% previously
• Japan trade balance 0.27tn vs. 0.13tn
• German PPI m/m 0.40% vs. 0.40%
• Canada wholesale sales m/m 0.10% vs. 0.20%

St. Louis Fed President Bullard expects one rate hike in 2016

President of the St. Louis Federal Reserve, James Bullard said on Friday that he expects to see one rate hike from the Federal Reserve in 2016. The comments came as last week; the Fed left monetary policy unchanged. However, quite a few policy makers expect to see one rate hike in 2016, although the majority still voted towards two rate hikes this year.

Kevin Logan, HSBC Chief Economist, said, “It appears to us that FOMC voters are close to evenly split between supporting one or two rate hikes this year. We believe the Fed Chair Janet Yellen is among the committee members that anticipates only one rate hike this year.”

The comments come after Bullard told reporters that he was one of the FOMC voters who had projected one more rate hike, through the end of 2018. According to Bullard, he expects the US real output growth at 2.0% while the unemployment rate is expected to be at 4.70% and PCE inflation at 2.0%.

Bullard said, “In light of this new approach and the associated forecast, the appropriate regime-dependent policy rate path is 63 basis points over the forecast horizon. [The FOMC] would make this final move here sometime this year.”

Other members that are seen dovish on the rate hike projections include Chicago Fed President Charles Evans and Eric Rosengren.

Japan posts first trade deficit in 4 months

Data from Japan’s Ministry of Finance, released on Monday showed a trade deficit of 40.7 billion yen in May. This was slightly above consensus forecasts of 40 billion yen. On a year over year basis, exports fell 11.30% in May, more than the expected 10.40% declines. Japan’s exports continued to plunge for eight consecutive months with the pace of declines accelerating from 10.10% declines in April. Imports were down 13.80% on a year over year basis, matching forecasts and falling for the 17th consecutive month due to depressed energy prices. The yen’s appreciation was also a factor, which has increased nearly 8.80% against the dollar compared to a year ago, making exports less competitive.

Japan’s exports to China fell 14.90% in May nearly doubling April’s 7.70% declines and falling for the third straight month. Exports to the rest of Asia were also down 13.0% accelerating from April’s 11.10% declines. Exports to the US fell 10.70% from 11.80% declines in April. The trade deficit is expected to show a slowdown in Japan’s GDP for the periods of April through June with analysts forecasting an annualized pace of expansion at only 1.90%. Sluggish global growth is expected to keep Japanese firm’s exports weaker alongside the strengthening yen which is expected to eat into the exporter’s profits.

SMBC Nikko Securities senior economist Koya Miyamae said, “Data for April and May released so far suggest that external demand–or the margin by which exports exceed imports–should still be in positive territory in the second quarter, but this isn’t necessarily a cause of celebration because it is due to “quite weak” imports.”

Sterling jumps as referendum campaign enters the final stretch

The Pound Sterling jumped nearly 0.80% on Monday, briefly trading near the highs of 1.4612 as latest opinion polls over the weekend showed that 45% of the people backed to remain in the EU with only 42% supporting to leave the European Union. After referendum campaigners briefly paused their campaigns following the shooting the Jo Cox, a British lawmaker, both the camps are expected to resume campaigning on Monday. The strong surge in the pound lifted other currencies, including the euro. However, investors are unlikely to take the current development lightly.

Osao Iizuka, head of FX trading at Sumitomo Mitsui Trust Bank said, “If another poll points to the opposite outcome, [the pound] can be sold. This isn’t a type of movement that could become a trend.” Echoing similar sentiments, Kosuke Hanao, head of FX at HSBC Tokyo said, “This is fairly short-term movement. I think [the pound] can still move in either direction.”

On the weekend, EU officials spoke on the issue. German Finance Minister, Wolfgang Schauble said that Britons could expect a tough response from the EU. He said, “In is in — out is out. I hope and believe that the British will ultimately decide against Brexit. The withdrawal of Britain would be a heavy loss for Europe.”