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June 30, 2016

Pound extends drop on Carney Stimulus Hints, Oil plunges.

Pound extends drop on Carney Stimulus Hints, Oil plunges.

After relatively optimistic start of the week, risk assets markets give up. Risk aversion seized commodity market in Thursday pushing crude prices down which curbed growth on European equities Euro and Pound. Both WTI and Brent lost around 3% pulling down global markets, which lost main driver of growth.
Pound traded near Wednesday close before BoE head Carney speech but tumbled after the policymaker announced Bank of England may soon cut the rates and add stimulus measures to bolster tottering economy. Investors increased their bets on rate cut which decision will be released on 14 of July. Sticking around 1.3450 level, GBP/USD sharply declined to 1.3225 as BoE stance has been known to public.

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We see little opportunity for pound to cap declines as elevated political uncertainty together with yet unclear Brexit effects on financial sector will keep outlook quite unfavorable for UK and its currency. With bond markets surging to the highs of 2008 US financial collapse what signals about very high levels of risk-aversion we can’t expect quick comeback of the bull market.

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Greenback index trim down declines made earlier this week, hitting 96.50 session peak but later receding to 96.00 zone. The growth was fueled by upbeat Chicago PMI report which was well above the forecast at 56.8 points vs. 51.0 anticipated. On the US labor market Continuing Claims came lower than expected at 2120K vs 2152K expected. Initial Jobless claims was slightly worse the forecast at 268K vs 267K estimated. The growth of US currency accelerated selloff of Oil prices, WTI tumbled 2.73% to 48.52, Brent -2.69% to 49.94, dropping below psychologically important $50 mark. Deterioration on crude market hampers advance on equity markets, which were trading near Wednesday close but surged on BoE Carney comments, encouraged by stimulus promises, DAX +0.71%, FTSE 100 +2.27%

We expect pound to resume declines after retracement to 1.33 with a target at 1.31 level. Crude prices have not enough fuel and favorable fundamental ground to climb above $50 level, what remains gloomy outlook for risk assets.

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