Aftershocks from political earthquakes in the UK and US are pulsing through the currency markets. Lynn Strongin Dodds reports.
In the not too distant past, foreign exchange (FX) markets were dominated by economic data and interest rate movements. Today, divergent central bank policy is a theme but politics has increasingly become a ruling force with the machinations over the US elections, the Brexit vote and a weakening Chinese economy wreaking havoc on currencies.
“What has been surprising is the way that FX markets have become more aligned with predictions of the outcome of an event,” says Hamish Pepper, a Barclays FX strategist. “This has not necessarily been the case historically. Perversely though, we have ended up with lower cross-asset volatility partly because the central banks in Europe as well as the Bank of England (BoE) showed they would be there to support the markets.”