Morning Update – 31/03/2016

Good morning all!

Since the turn of the New Year, the word ‘caution’ has been widely used within the financial markets. In the FED’s speech two days ago, Chairman Janet Yellen once again stressed on this word and explained its importance in today’s markets. In the speech, the FED attempted to give their view on the state of the economy and provide guidance for future performance. Analysts interpreted her speech to be a dovish one, signifying no future interest rate hikes for the time being.

Markets saw her comments as dovish too. According to CME group, the probability of a rate hike by next month’s meeting fell slightly, from 28.4% to 25%. While the majority of voting members of the FOMC see at least two rate hikes this year, the market is betting there is now a 79% chance of one or fewer hikes this year; up from 60% before Yellen’s speech on Tuesday.

During and following her speech, the dollar was sold off against all currencies. Cable, which has been significantly weak recently, rallied 120 pips initially. Just over a month ago, the pound tumbled below $1.39 for the first time in seven years amid uncertainty with regards to the UK Referendum happening in June. Analysts at HSBC warned that exiting the European Union would severely damage the UK’s growth prospects.

Last year analysts at Morgan Stanley said a Brexit vote would expose the country to a “referendum shock”. From now until June we are to expect fluctuations in the cable price, most probably to the downside. Favourable economic data will however help the currency pair, one of these being the GDP value for the UK being announced this morning.

Good luck!