Make or Break for Brexit

February 19, 2016

By the end of today, we should have a decent idea whether the UK is set to have a referendum on EU membership this year and also the deal on the table in terms of the UK’s revised relationship with Europe. This matters for sterling, which has certainly shown strong signs of concern so far this year. In January, it was one of the weakest currencies on the majors as the uncertainty weighed. But there could be more of this to come should the referendum date be confirmed either today or early next week. The main issue is the behaviour of overseas investors in UK assets, of which there are increasing numbers given the UK’s persistent current account deficit. January’s price action was indicative of overseas investors both lightening up on sterling exposure and also hedging their asset positions. Such action could well accelerate into a Brexit referendum mid-year, not because investors are taking a view on the outcome, more that they are reacting to the on-going uncertainty created, given that polls are not decisive either way.

Elsewhere, the Canadian dollar is going to be closely watching the latest inflation data today at 13:30 GMT, where the headline rate is seen rising to 1.8% (from 1.6%). The market still places a decent probability on the chance of a rate cut in Canada this year, the economy struggling to escape the slowdown seen last year given the weakness seen in commodity prices this year. The Canadian dollar has enjoyed a decent recovery from the pressure seen in January, but will be sensitive to weaker than expected data given the rate cut risks. US inflation data is also seen at the same time, but the impact there is likely to be limited, given that expectations for a near-term move in rates either way is very low.

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