EUR/USD Impact – Pound Falls for 2nd Day as Risks From Budget to `Brexit’ Build

Good day readers.

As the euro area braces for the outcome of the Britain referendum on euro zone membership, it is important to monitor the developments. An exit is likely to inject aversion as this may be taken as a failure of the European Union. Implications to the EUR/USD is likely to be expected. This Bloomberg article is a good update.

The risks are stacking up for the pound.

Britain’s currency fell the most in three weeks versus the dollar as investors braced for a budget at which fiscal tightening is anticipated, a Bank of England statement that they’ll peruse for indications about the interest-rate path and a Federal Reserve gathering where, speculation is building, officials will signal a boost to U.S. borrowing costs later in 2016.

And in the background were renewed investor concerns that the U.K. will quit the European Union. “The big driver at the moment remains ‘Brexit’ nerves but the budget is starting to have a compounding effect,” said Daniel Loughney, a London-based money manager at Alliance Bernstein, which manages about $456 billion. Tighter fiscal policy may “increase the probability of a rate cut” from the BOE, he said.

The pound dropped 1 percent to $1.4162 as of 1:53 p.m. London time, set for the biggest slide since Feb. 22 and its second day of declines. Sterling weakened 0.9 percent to 78.35 pence per euro.

U.K. government bonds rose for a second day. The benchmark 10-year gilt yield fell four basis points, or 0.04 percentage point, to 1.51 percent. The 2 percent security due in September 2025 climbed 0.35, or 3.50 pounds per 1,000-pound face amount, to 104.29. Austere Budget

In an interview with the BBC on Sunday, U.K. Chancellor of the Exchequer George Osborne warned that Wednesday’s budget statement will include more spending cuts.

Interest-rate indicators also back the case for a depreciation of sterling.

While there’s little chance of the Federal Open Market Committee raising rates when it announces its latest policy decision on Wednesday, the odds of action by the December meeting stand at about 78 percent, according to futures prices compiled by Bloomberg. That compares with 30 percent a month ago.Economists in a monthly Bloomberg survey put the […]

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