FX round-up: Sterling's rise on UK staying in EU may be short lived

Sterling turned in solid but potentially short-lived gains today against a mob of currencies as traders warmed to a trinity of gauges that suggest the UK will remain in the EU.

The June referendum has cast a weeks-long pall over sterling, summed up by Bank of England’s Monetary Policy Committee last week when it flagged downside risk to the unit if UK quits the EU.

Ipsos Mori’s Political Monitor for 18 May said 55% of 1002 people surveyed wanted UK to remain in the EU, against 37% wanting it to leave. Betfair said separately the odds of a British vote to stay in the EU was up to 76% on Wednesday. Same day, a Bank of America Merrill Lynch survey of fund managers showed 71% believed a UK vote to exit the EU was either unlikely, or not at all likely.

At 17:35 BST, sterling was up 1.00% against the greenback at $1.4608, up 1.41% at €1.2960, and ahead 1.55% at 160.299 yen.

It rose 1.15%–1.61% versus the commodity-based Canadian, New Zealand and Australian units, and 2.44% against the rand as investors sold on concerns surrounding the potential tenure of South Africa’s embattled Finance Minister, Provin Gordhan.

Capital Economics said a referendum outcome for the UK remaining in the EU should see sterling rebound, noting the spectre of a departure from the single-currency bloc had put a dampener on expectations of central banks tightening fiscal policy.

“But, we think any (sterling) strength is unlikely to be sustained, as monetary policy tightens even faster in the US than the UK relative to expectations,” said Capital Economics, which expects a UK rate rise before end-2016.

“Meanwhile, there’s less evidence that UK equities and gilts have been reacting to Brexit fears, so the implications of a “remain” vote should be limited.”

The greenback also turned in an overall positive performance today, ahead of the US Federal Open Market Committee (FOMC) issuing its most recent minutes which were due out later that same day.

The US dollar was up 0.35% to €0.8870 and up 0.53% at 109.72 yen. Against the aussie, kiwi and loonie the dollar made gains of 0.09%–0.56%, and nipped up 1.4% against the rand. The dollar index spot price was up 0.16% to $94.695.

Gold had tiptoed 0.3% lower to $1273 an ounce and copper fell 0.6% to trade at $207.65 a pound.

Against this backcloth, UK’s 10-year gilt yields were up seven basis points to 1.44%, while stateside 10-year Treasury yields were up 5 basis points to 1.82%, alongside gains in yields on the policy-sensitive two-year notes.

FX Daily commented that futures implied a stronger risk of a US rate hike this year, after hawkish comment Tuesday from three top US Federal Reserve officials – regional bosses Robert Kaplan, Dennis Lockhart and John Williams.

FOMC member Eric Rosengren said last week that he could conceivably vote for a June interest-rate lift.

FX Daily added that while the market-ascribed probability of a June or July rate hike had increased, it remained low.

“This suggests that a summer policy move from the Fed would likely trigger a brutal reaction in the USD.”

As of 18:51 the Chicago Mercantile Exchange’s Fed Watch tool was putting the probability of a 25 basis point increase in the range for the Federal Reserve’s main policy rate at its 15 June meeting at 18.8%, up from nearly zero just a few weeks ago.