EU Referendum

GBP/USD followed-through modestly to the downside on Tuesday to hit a new one-month low amid continuing strength in the US dollar. This new low follows a clean breakdown last week below a key uptrend line, which has opened the way back down towards October’s multi-decade lows near 1.2000.

EUR/USD has been climbing from its post-Brexit lows for nearly the past month. Much of this rise has been attributed to weakness in the US dollar, as bets on a Fed rate hike this year have progressively diminished in recent weeks. Wednesday’s release of July’s FOMC minutes failed to help matters much for the US dollar, as the Fed was seen as sharply divided in opinion and unlikely as a whole to raise interest rates in the near future.

Needless to say, markets in the past week have been rocked to and fro by the prior week’s Brexit decision. In the aftermath of Britain’s historic vote to leave the European Union and the resulting political turmoil, global financial markets have reacted in extreme and varied ways.

Bank of England (BoE) Governor Mark Carney made a speech on Thursday indicating that the central bank is likely to cut interest rates within the coming months in reaction to last week’s Brexit outcome that saw the UK vote to leave the European Union. Carney stressed that while the results of the referendum have been made clear, the full implications of a Brexit on the UK’s economy have not yet.

Wednesday was another “risk-on” day for the global financial markets, extending Tuesday’s bullish reversal as Brexit worries continued to abate. US and UK stocks surged sharply as crude oil spiked up on a much larger-than-expected draw in US crude oil inventories (-4.1-million-barrel draw vs. -2.3 million expected) as reported by the US Energy Information Administration. Meanwhile, sterling and euro extended their respective rebounds from Tuesday, only days after both currencies plummeted when Brexit voters emerged narrowly victorious from last week’s EU referendum.

Although the euro and pound both suffered massive hits as a result of last week’s Brexit decision, the euro has fared substantially better than sterling in the aftermath of Thursday’s EU referendum. While both currencies were expected to plunge on a Brexit outcome, it was also projected that the British pound would endure a significantly more severe blow. This was indeed to be the case, as the EUR/GBP chart displays an exceptionally sharp surge from the pre-Brexit 0.7600 low, representing a swift and sudden appreciation of the euro against the pound after the UK voted to leave the EU.

Both sterling and the euro found some relief on Tuesday with relatively modest bounces as profit-taking on short positions occurred after recent sharp declines, and the markets took a tentative breather from Brexit concerns. As may have been expected on such a breather, global stocks also generally bounced and safe haven gold fell from its recent long-term highs. Another major safe haven asset, the Japanese yen, which had been in exceptionally high demand after the historic outcome of last week’s British EU referendum, subsequently made a retreat on Tuesday.

EUR/USD made a key breakdown below major support on Friday after the outcome of the UK’s EU referendum was acknowledged. This breakdown occurred as both the pound and the euro were quickly sold-off on speculation of impending financial and economic turmoil in the UK and European Union as a likely result of the Brexit decision. At the same time, the US dollar was heavily-bought and boosted as a safer alternative to the embattled UK and euro zone currencies.

It is of little surprise that sterling has been the hardest hit of all currencies, and indeed of all major financial markets, as a result of last week’s surprise UK vote to leave the European Union. The Brexit outcome prompted an immediate chain reaction of severe volatility in markets across the globe, with the British pound absorbing the brunt of the damage, as previously projected. Also as expected, safe haven assets have been strongly boosted as a result of the Brexit-driven financial turmoil, with a particularly strong impact on the Japanese yen.

The outcome of Thursday’s historic EU referendum, in which nearly 52% of UK voters opted to leave the European Union, stunned markets globally in its immediate aftermath on Friday morning. The vote counting began with a surprisingly sizeable lead for Leave at over 60% of voters in Sunderland, and the pro-Brexit camp never looked back as it continued to maintain a modest advantage throughout the vote tally, even after the expectedly pro-Remain London votes came in.

As markets across the globe early on Referendum Thursday continued to reflect strong conviction that the majority of Britons would vote to remain in the European Union, USD/JPY tentatively surged above key resistance around the 105.50 level before paring some of its gains. This sharp rise was primarily due to substantial weakening of the yen, as bets that a Remain outcome would prevail prompted a considerable shift away from the safe haven Japanese currency. This shift occurred as the “risk-on” environment that began this week continued to prompt buying of riskier assets and a sell-off in assets that have traditionally been considered safe havens, like the yen and gold.

The price of gold less than a day ahead of Britain’s EU referendum hangs by a very thin thread. Since late last week, when market concerns over a potential Brexit began to wane, that thread has become even more tenuous. The precious metal has been falling for the past week from last week’s long-term high above $1300 resistance as the Remain campaign within the Brexit debate has regained some momentum in recent days. Still, despite volatility in recent polling, the overall picture continues to show an exceptionally tight race, with polls of polls showing the two sides essentially even.

In the immediate run-up to Thursday’s EU referendum in the UK, as market participants have increasingly come to doubt the probability of a pro-Brexit outcome, a general “risk-on” environment has enveloped global markets. With respect to currencies, the two that potentially stand to gain or lose the most from the outcome of the vote, the British pound and the Japanese yen, have reacted in somewhat predictable ways to this new market environment.

Since late last week, the decline in Brexit concerns due to new polls showing resurgent momentum for the Remain camp has had significant consequences for financial markets. A new-found perception of lower risk ahead of this week’s EU referendum in the UK has led to a sharp relief rally for the previously pressured British pound as well as weaker performance for traditional safe haven assets like gold, yen, the US dollar, and Swiss franc.

The tragic killing Thursday of a pro-EU politician, UK Labour Party MP Jo Cox, occurred just a week before Britain is scheduled to hold its EU referendum to vote on whether or not it will remain in the European Union. This horrific event has naturally sent shockwaves across the UK and around the world, leading to a temporary halt in the previously aggressive campaigning from both sides of the Brexit debate.

After the Bank of Japan’s (BoJ) decision early Thursday to refrain from implementing additional monetary easing measures, the yen surged sharply against its global counterparts, including the US dollar, euro, and pound. Among the most pronounced of these yen-driven moves occurred with the EUR/JPY currency pair, which had already been heavily pressured since at least the beginning of June amid increasing concerns of a Brexit, or a UK exit of the European Union.

The June FOMC decision has come and gone and although the Fed fulfilled expectations by opting to keep interest rates unchanged at 0.25%-0.50%, some compellingly dovish nuances came out of both the statement and then the press conference that followed.

There are clearly several very major events within the next two weeks that have substantially intensified speculation on the British pound and, to a lesser extent, the US dollar. This speculation ahead of these events has prompted a sustained spike in volatility for GBP/USD. For the past week, this volatility has pressured the currency pair to trade significantly lower, breaking down below key support levels.

GBP/JPY dropped to touch a new multi-year low below 150.00 on Monday, hitting a level not seen since August of 2013. As might have been expected in the run-up to next week’s EU referendum in the UK, this drop has been largely fueled by unease over the near-future prospects of the British pound if a Brexit vote (a UK decision to leave the European Union) prevails. Further driving the pressure on GBP/JPY has been a general boost for the safe haven Japanese yen, partly also due to market jitters ahead of the upcoming referendum.

Global financial markets in the past few weeks have been utterly dominated by increasingly shaky speculation over two major themes – future US interest rate hikes and the possibility of the UK voting to leave the European Union. These two themes will be front and center for the next two weeks, at the very least, as the next FOMC meeting and rate decision in the US will occur next week, while the UK’s EU referendum will be held the following week. Both the speculative risk preceding these events as well as their actual outcomes have and should continue to have wide-ranging repercussions on the global markets, most notably with respect to currencies and equity markets.

EUR/JPY dropped to a new three-year low of 120.30 early on Thursday, dipping slightly below its previous long-term low that was hit late last week, before paring its losses by the afternoon. Helping to drive the currency pair lower on Thursday was a general risk-off sentiment during the earlier part of the day that prompted the safe haven yen to gain favor.

Despite a dollar pullback on Wednesday, sterling weakness dominated price action for GBP/USD, extending the currency pair’s plunge from Tuesday. This sharp retreat for GBP/USD in the first half of the week has been driven largely by a resurgence of popular support in favor of the UK leaving the European Union, as reflected in the latest polls. These polls have shown that the possibility of a “Brexit” outcome still remains a major risk factor for financial markets, most notably the pound, in the run-up to the June 23 EU referendum only three weeks from now.

US Federal Reserve members have repeatedly voiced concerns over the risk of a potential UK exit from the European Union, or “Brexit.” Most recently, Fed Governor and voting FOMC member, Jerome Powell, alluded to the upcoming EU referendum in a speech on Thursday. While Powell reinforced the Fed’s recent hawkish turn, stating that a rate hike should be appropriate “fairly soon,” he also mentioned that the EU referendum remained a significant concern.