John J Hardy
The UK’s exit from the European Union is causing volatility in GBP, says Saxo Bank’s head of FX strategy John Hardy, and may be the start of a squeeze on sterling pairs.
Article / 16 June 2016 at 12:16 GMT

Europe: The Final Countdown?

Head of Trading / The ECU Group plc
United Kingdom

eu ref

 Whatever the result, market volatility before and after the referendum is a given. Pic: iStock

By Neil Staines

“I guess there is no one to blame” – Europe, The Final Countdown

Today, a large percentage of the UK population may be more concerned about exit from the Euro 2016 Football tournament than from the EU, however, with just a week to go until the historic referendum, the Brexit debate is taking centre stage on a global scale. Moreover, Brexit is not just a source of uncertainty among investors and forecasters, but increasingly it has been used as a (convenient) source of blame for global policy makers.

The Bank of Japan left policy unchanged this morning, as was broadly anticipated (some had looked for further policy easing), a decision that saw the JPY soar to its highest level in almost two years. While governor Haruhiko Kuroda stated that he “would not hesitate to take action if needed” he highlighted that the BoJ was in close contact with the BoE, amid Brexit concerns that it was inferred were the dominant force behind the safe haven bid in the JGB market.

“With so many light years to go” – Europe, The Final Countdown

In the US, the Federal Open Market Committee also left policy unchanged and while the statement omitted explicit reference to international factors, the Q&A referred to the Brexit referendum and the “great deal of uncertainty” associated with it. 

While the Fed left rates unchanged, its latest Summary of Economic Projections highlighted a sharp downgrade of growth and interest rate projections (the ‘dots’). From our perspective, herein lies the important issue for markets. The Fed’s reduction in medium-term growth expectations and a significant downwards shift in the expected path of interest rates (albeit to levels still significantly above market expectations) highlights the more secular nature of the low growth, low inflation backdrop.

Furthermore, Fed chair Janet Yellen clearly pointed out that there are a number of factors keeping interest rates (and interest rate expectations) low, from the expected rate path, to the lower (and probably declining) term premium, which she suggested was likely further impacted by asset purchases by the European Central Bank and the BoJ. A lower (and flatter) US interest rate curve should in our view undermine the USD. However, against the current backdrop where JPY, EUR and GBP all have their own real and imminent concerns, expressing this view is more complex than usual.

There is, however, one area that we see as increasingly clear, rather than increasingly complex, and that is the overvaluation of equities. Irrespective of our view that the US is behind the curve on interest rates, high valuations and shrinking earnings question the near-record levels for equity markets (particularly in the US).

“Will things ever be the same again”  – Europe, The Final Countdown

In the UK, the chancellor and the prime minister have been widely criticised for the scare tactics of "project fear". However, if we take a step back from the coalface of the global macroeconomy it could be argued that things are not as bad as policymakers would lead us to believe. The US is growing at a solid, if unspectacular, 2-2.5% range, with a 4.7% unemployment rate, yet real interest rates are firmly in crisis mode at around -1.0%. Japan has one of the highest GDP per capita rates in all developed market economies, yet its central bank remains fixated on attaining a 2% inflation target – at all costs.

In Europe, negative interest rates have demolished the business models of the banking and insurance industries, ironically the sector upon which it relies for the transmission of its non-standard monetary policy activism. As the options to stimulate growth and reduce debt in the Eurozone become increasingly narrow it is likely that the most effective route (though in some sense most complex) is through fiscal measures and structural reform, and no longer through monetary channels. Tighter fiscal unity within the Eurozone places a UK with its exemption from "ever closer union" increasingly on the outskirts, even if it votes to Remain.

“And still we stand tall”  – Europe, The Final Countdown

As we enter the final countdown for the EU referendum proselytising, opinion polls (and interestingly the bookmakers' odds) have clearly ebbed towards a ‘Leave’ vote. The connotations for financial markets are mixed. Uncertainty and illiquidity are likely to increase over the coming days. While the further dovish evolution of the Fed should undermine the USD against GBP, EUR and JPY, at these levels it is not clear that US dynamics will be the dominant force.

The risk-off backdrop is, however, likely to be maintained and on that basis buying gold and selling equities (particularly US equities). In many respects, a healthy correction in overvalued stock markets may be welcomed by global central bankers, especially if they can blame the whole thing on Brexit.

– Edited by Clare MacCarthy


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

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