Weeks of uncertainty came to an end today after referendum results showed that the majority of Scottish voters decided to stay within the UK, providing a much needed relief to the Pound against the majors. Market participants would now be interested to see how the Prime Minister, David Cameron, executes his pledge to give additional powers to Scotland. Against the backdrop of encouraging domestic economic data lately and a crucial risk event of Scottish referendum out of the way, market attention has once again shifted to the prospects of an interest rate hike in the nation.
Although the US labour market continues to show a sustained recovery, the impact of persistent housing market weakness on the nation’s economic recovery cannot be ruled out.
Pound Sterling – UK Markets
Sterling investors breathed a sigh of relief after Scotland decided to stay a part of the UK, with the “No” campaign winning 55% vote. This has supported gains in Sterling against the majors, with the Pound-US Dollar pair trading above the 1.64 mark this morning. Now that the Scottish referendum is out of the way, it would be interesting to see if David Cameron bestows additional powers to Scotland as promised by him earlier. Meanwhile, market focus has now shifted onto the timing of interest rate hikes in the nation, especially after this week’s labour market report which showed a significant improvement along with encouraging wage growth. In the absence of major economic releases in the UK and the US today, the Pound is likely to remain supported against the majors.
In yesterday’s trading session, Sterling moved sharply higher against the US Dollar amid expectations that Scotland might vote against independence. Meanwhile, data released yesterday indicated that retail sales in the nation rose for August, further supporting belief that the economy is treading path to broad-based recovery.
US Dollar – US Markets
The greenback lost major ground against the Pound yesterday amid speculation that majority voters participating in the Scottish referendum voted against independence. Today’s referendum outcome has shown a similar result, further pressurising the greenback against Sterling. Additionally, losses in the US Dollar were extended after the US Fed Chief comments this week highlighted that the slack in the labour market along with weak wage growth in the US still remained a major concern. Furthermore, data released yesterday showed that housing market conditions in the US continued to remain fragile for August, offering further evidence of dampened domestic conditions. Meanwhile, markets shrugged off yesterday’s upbeat US jobless claims report and provided little support to the US Dollar.
With no major US economic data scheduled today, the greenback is likely to remain under pressure against Sterling after the final results of Scotland’s referendum showed that Scotland would stay with Britain. Furthermore, next week’s US preliminary Markit manufacturing PMI and durable goods orders data will be eyed for further direction.
Euro – European Markets
The results of the first round of the Targeted Long Term Refinancing Options (TLTRO) Programme released yesterday indicated that banks borrowed just €82.6 billion at the auction, less than market expectations. This stoked speculation that the ECB might implement additional stimulus measures to shore up the ailing economy. However, the common currency showed little reaction to the results.
This morning, the Euro-Sterling pair is trading under pressure as the outcome of the Scottish referendum revealed that majority of the voters supported Scotland to remain in the UK. Additionally, data released earlier today showed that German producer prices continued to decline for August, thereby heightening concerns that a deflationary threat is firming up in the Euro zone. Going ahead, market participants will keep a tab on next week’s speech from the ECB Chief, Mario Draghi, for hints about the prospects of further easing measures in the economy. Additionally, the preliminary manufacturing PMI readings for September across key European nations will be eyed to gauge economic conditions for the third quarter.
Other Currencies – Highlights
The Japanese Yen lost ground against the greenback and the US Dollar-Japanese Yen pair crossed the 109 mark earlier today after the Japanese government, in its monthly economic report for September, reduced its overall assessment on the economy for the first time in five months. Additionally, data showed that Japan’s all industry activity unexpectedly fell for July. A slowdown in the nation’s domestic activity was mainly due to the April sales tax hike which continued to dampen domestic demand. Meanwhile, the Bank of Japan Governor, Haruhiko Kuroda, reiterated yesterday that the nation will get back on its growth track, citing prospects of an improvement in exports. This was confirmed by this week’s trade report which showed that exports in Japan declined less than expected for August.
With no other domestic economic releases scheduled today, the Japanese Yen is likely to take direction from global cues.
Pound falls further
British Pound Suffers Losses Ahead of Tuesday's Critical Vote