Daily Market Report - 28/05/2015

Sterling hit its weakest against the dollar since the aftermath of the UK's national elections yesterday, after a speech by The Queen set in motion a referendum on the UK's membership of the European Union. A EU referendum by the end of 2017 is among a programme of new laws in the first Conservative Queen's Speech in nearly two decades. European head of FX strategy at Credit Agricole (Adam Myers) stated that "Even though it's likely that the UK wants to stay in (the EU), any political uncertainty is as good an excuse as any to cause a bit of a squeeze or reversal in sterling positioning after what's been a strong run."

Analysts have been flagging concerns about a possible British Exit of the EU. Many say the risks to a UK economy, which relies on inflows of investment and capital to fund its 100 billion-pound current account deficit, are greater now than they were during the Scottish independence referendum in September 2014. 

The main issue concerning the strength of the EURO is the Greek situation. According to a Goldman Sachs Strategist the main scenario that is likely to occur between Greece and their lenders is that the deal will ultimately end in a compromise from both sides with no Greek Exit and a period that could witness missed payments. We saw recently that the Greek Prime minister has said openly that Greece does not have the money to pay 300 million euros to the IMF on June 5. Despite this Greek Finance Minister Yanis Varoufakis expressed confidence a deal with lenders would be struck in time to avoid default. Greek officials have been holding negotiations with Eurozone and International Monetary Fund officials in Brussels for weeks now and yesterday Greek Prime Minister Alexis Tsipras said the country is close to an agreement with its international creditors over its rescue program. 

Many central banks around the world are watching whether the US dollar can regain momentum and help stimulate their slowing economies. Countries are relying on weaker currencies to boost their growth prospects in the global low interest rate environment. The US dollar has pulled back, hit by weak economic numbers that have clouded the timing for when the US Federal Reserve may finally start lifting borrowing rates. Unless the disturbed signs of a pick-up in the US economy turn into something more sustainable, a further downward drift in the world’s reserve currency stands to complicate policy for many central banks. The USD has rallied strongly in recent sessions, with the dollar index rising a further 1.1 per cent earlier this week (Up 4.2 per cent in the past seven trading days). The dollar rose against most major currencies yesterday, hitting an eight-year peak against the yen on expectations the Federal Reserve would raise interest rates later this year due to signs the U.S. economy is recovering from an unstable first quarter. 

Key Announcements
GBP - 9:30 – Second Estimate of UK's Gross Domestic Product (QoQ) Expected to rise to 0.4% from 0.3%
USD - 13:30 – Unemployment claims
All - All Day - G7 Meetings

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