British Pound Rallies as Investors Increase Bets on “Remain”

Forex markets put in a lackluster performance last week with the British Pound posting the largest gain for the week against the U.S. Dollar and the Euro. The lack of fresh economic news, light trading ahead of the U.S. and U.K. bank holiday on May 30 and general month-end position squaring was behind the below average volume and volatility.

The GBP/USD finished the week at 1.4616, up 0.0119 or +0.82%, and in a position to challenge the recent top at 1.4769. Most of the gains took place on May 24 as market expectations waned somewhat of a British exit from the European Union, so-called Brexit.

With less than a month to go before the June 23 referendum on Britain’s future in the 23-counry EU, bookmakers slashed their odds on a “remain” vote. Bookmaker odds on remaining in the EU were 1 to 7. The odds of a Brexit were 4 to 1. Adjusting for the bookmakers’ margins, the chance of Brexit is now close to 20 percent.

In addition to the shift in bookmakers’ odds, a new poll showed the “remain” camp with a 13-point lead. This helped pressure the EUR/GBP which closed the week at 0.7599, down 0.0136 or -1.76%.

The AUD/USD had a volatile week with the price action driven in both directions by expectations of a rate hike by the Fed in June or July, and comments from Reserve Bank of Australia governor Glenn Stevens and U.S. Federal Reserve Chair Janet Yellen.

The week started with the Aussie being driven into its lowest level since the week-ending March 16 before finishing the week at 0.7183, down 0.0037 or -0.51%. Comments from RBA governor Stevens helped trigger a short-covering rally mid-week.

He said the RBA is “very committed to the inflation-targeting monetary policy framework”. Although the comments probably mean rates are going to be cut again, they did give short-sellers an excuse to book profits after a prolonged decrease. The Australian Dollar strengthened late in the week on pessimism about a U.S. rate hike in June, but weakened at week’s end because of hawkish comments from Fed Chair Yellen.

June U.S. Dollar futures finished the week 0.157 higher, at 95.50. The dollar gained strength against most major currencies on Friday after Federal Reserve Chair Janet Yellen said an interest rate hike in the next few months would probably be appropriate.

“It’s appropriate —and I’ve said this in the past – for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said Friday during remarks at Harvard University in Cambridge, Massachusetts. “Probably in the coming months such a move would be appropriate.”

“The economy is continuing to improve,” she said in a discussion with Harvard economics professor Gregory Mankiw. She added that she expects “inflation will move up over the next couple of years to our 2 percent objective,” provided headwinds holding down price pressures, including energy prices and a stronger dollar, stabilize alongside an improving labor market

Yellen’s comments limited some lingering doubts that she might not be on board with a rate hike in the near future. The U.S. Dollar’s price action late Friday suggests those doubts may have been dissipated.