Should the Fed Care about Britain? – Westpac
Sean Callow, Research Analyst at Westpac, suggests that this week JP
Morgan Chase CEO Jamie Dimon predicted that increased volatility is here
to stay.
Key Quotes
“A dovish Fed
should help limit volatility into mid-year but there is major political
event risk that is very difficult for markets to price in fully. The
next set of FOMC members’ quarterly projections and press conference by
Chair Yellen is due at the 14-15 June meeting. Inconveniently for the
more hawkish FOMC members, the UK vote on EU membership is set for the
next week, 23 June. Normally the FOMC does not need to worry about
political developments abroad, particularly not in the UK.
But
with opinion polls tight, the UK referendum is causing considerable
market angst. Since the date of the vote was announced on 20 Feb,
sterling has been easily the weakest currency in the G10, indeed the
only one to fall against USD (-2%), with gains ranging from EUR’s 2.4%
to AUD’s 6.3% at time of writing. Three month GBP/USD implied volatility
has risen from around 8% early Jan to around 16% today.
At other
times, the UK vote could still be a non-factor in Fed policy. But at a
time when Fed chair Yellen has just delivered an influential speech
including the word “uncertainty” in its title and declared that “global
developments have increased the risks” to the outlook, markets are
likely to include the “Brexit” uncertainty as one reason to expect a
steady hand in June as well as this month. Pricing for a June hike is
just 20%. While we expect better US data over Q2 to support the case for
Fed tightening, 23 June will continue to stand out in the calendar as
substantial event risk for markets well beyond the UK.”
(Market News Provided by FXstreet)
