Brexit woes

In fact, we’ve already seen some financial uncertainty since the result on Friday 24th June. Sterling has fallen approximately 10% against the dollar at $1.31 (the lowest price since 1985). What’s more, global stock market have suffered a shock, with an estimated $2.7 trillion being wiped off global stock indexes.

As witnessed in January 2016 during the Chinese stock market crash, Yellen is well attuned to financial risks emanating from abroad. The leaving of Britain from the EU certainly poses some contagion risks to the global economy including the USA. Consequently, market expectations, according to Fed fund futures, for any more hikes from the Fed this year have dropped to below 15% from 50% prior to the referendum.

Strength in greenback

Nevertheless, the greenback continues to be supported as a safe-haven asset during times of uncertainty, as evidenced by the USD’s rally against all major currencies aside from the yen following the vote. The yen of course being the primary safe-haven currency.

Although Fed Chair Yellen did not explicitly rule out a Fed hike in July, the chances are essentially zero given the latest miss on employment figures, combined with the increased risks from Brexit. The Fed will clearly signal to the market when they intend to seriously consider a rate rise and this has not been communicated regarding the July meeting.

Another factor to bear in mind here is the recent slowdown in US job creation. In May, the US economy created 38,000 new jobs, which was the lowest figure for five years. Commentators had predicted the creation of approximately 155,000. When looking at the detail behind these numbers, it shows that nearly half of the major industries within the US lost jobs. These sectors include mining, construction, manufacturing, wholesale trade and information technology.

In addition, temporary jobs fell by 21,000. This metric can be used as another gauge of how healthy hiring is in the US. The statistics for 2016 represent the most distinct drop in temporary work since 2007. It’s widely accepted that strong temporary hiring is sign of a booming economy.

Having said that, the USD is likely to remain well supported as long as there is uncertainty in the market. But traders should keep in mind that misses on upcoming tier-one data will provide choppy conditions in the major pairs as the market becomes torn between risk-off flows into the buck and a requisite repricing of a lower rate hike path.

Jarratt Davis
FX trader, Funds Manager and Mentor
Author of How to Trade a Currency Fund