Should the Fed care about Britain? – Westpac

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Apr 7, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    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.”
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