Article / 03 June 2016 at 12:20 GMT

Brexit battle descends into bathos

Head of Trading / The ECU Group plc
United Kingdom

  • Thursday's ECB meeting shows bank in a 'holding pattern'
  • Brexit campaigns veering between scaremongering, self-parody
  • NFP release to be followed by remarks from FOMC dove Brainard

Success is going from failure to failure without loss of enthusiasm” — Winston Churchill

Yesterday’s European Central Bank meeting provided very little that we didn’t already know (an unchanged EURUSD exchange rate after the press conference is testament to that), but there were a number of subtle implications that are worthy of note. 

Effectively, this was a holding pattern from the ECB as they await the impact of the "kitchen sink" policy actions taken March, especially those that have not yet been implemented such as the corporate bond-buying programme and TLTRO II.

ECB president Mario Draghi stated that the bank retains ample flexibility and room for further monetary expansion (not surprising given the market reaction to his admission that interest rates are at the lower bound in March), maintaining the explicit easing bias/forward guidance. Furthermore, the staff projections pointed to higher growth and inflation for this year, yet unchanged inflation and lower growth at the two-year "policy relevant" horizon. 

This supports our view that the recovery in Eurozone activity in the near term is cyclical and that structural long-term weakness remains.

Old town

The Eurozone is recovering, but retains deep and fundamental problems. Photo: iStock 

Draghi was clear that euro area growth prospects were being damped by subdued emerging market prospects, Brexit risks and slow structural reforms. However, he also explicitly reignited the currency issue with the reiteration of the ECB lower for longer mantra in conjunction with the statement that the EUR exchange rate is “important for price stability” and, “reflects the relative difference of [monetary] policies”.

From a technical perspective there are a number of signals that indicate the potential for renewed downside risks to the EUR, even excluding the potential impact of a Brexit. The basic balance (the sum of the current account, FDI and portfolio flows) remained fairly stable throughout 2015 as large portfolio outflows offset the current account surplus. However, a recent acceleration in FDI outflows and outward M&A provide a deteriorating backdrop that should ultimately weigh on the EUR.

...all the virtues I dislike, and none of the vices I admire” — Winston Churchill

In the UK, the Brexit debate is heating up and with less than three weeks to go, the polls (and even bookies’ odds) have narrowed. Unfortunately, the quality and content of the debate has deteriorated into almost caricatured politicking. For the Remain camp, Britain is not just stronger in the EU, but could never leave as the implications would be too catastrophic (a stance for which Cameron appears to be coming under increasing criticism for). 

For ‘Leave’, the EU is the source of all the UK’s exaggerated woes. 

Both sides risk patronising and alienating their respective support. ‘Project Fear’ has so far singularly failed to address any of the risks to the UK economy from remaining in the EU (particularly given the almost inevitable push for political and fiscal union within the Eurozone - leaving the UK in the EU but to all intents and purposes out of the loop). 

‘Vote Leave’ has also failed to address what the plan would be should they achieve their goal.

Pall Mall

"Empire reinstated." Photo: iStock 

“One does not leave a convivial party before closing time” — Winston Churchill

With the polls narrowing, time elapsing, and the politics heating up we expect the debate to gain increasing prominence in financial markets over the coming weeks. In the regard we would expect volatility to pick up, UK equities to begin to underperform, and GBP to become vulnerable in FX markets once more.

For today, however, the focus of financial markets lies with the US employment report for May.     

Corporate profit drag (and strike action) and GDP weakness are likely weigh on the headline figure which we expect to dip below the 150,000 mark. However, this pace of hiring is likely still enough to nudge the unemployment rate lower and does nothing to damp the impressively resilient US labour market expansion.

I’m just preparing my impromptu remarks” — Winston Churchill

For FX, equity markets and broader risk sentiment, the bigger emphasis will likely be on the reaction of US yields (rate expectations) from the employment report. US two-year yields have fallen back over recent sessions, following the move higher on the (relatively) hawkish comments from Federal Reserve chair Janet Yellen ahead of the long weekend, and any push into new high ground will likely weigh on equities and boost the USD. 

Any developing sentiment could well be tested or compounded into the close as the "arch dove" on the Federal Open Market Committee, Lael Brainard, adds her thoughts on the economic outlook and monetary policy at 1630 GMT.  

— Edited by Michael McKenna

Neil Staines is head of trading at The ECU Group


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail