Synergy FX Forex Market News | Friday 1st July, 2016
A week after UK voters chose to leave the EU, a growing number of market commentators are arguing that the media, politicians and some economists exaggerated the impact that a “Brexit” vote would have on the UK economy and British assets. The frequent stream of reports about a second referendum, Scotland vetoing the decision to leave the EU, political infighting and UK never planning to invoke Article 50, suggest the financial media were firmly biased to the “remain” camp.
In addition, caustic comments from EU officials about how to renegotiate trade and security agreements with the UK suggests that many well pensioned bureaucrats on the continent are very angry that:
1) a majority of UK voters were willing to fight the EU status quo; and
2) The UK Government is willing to honor the will of the UK voters. It’s clear that this type of pure democratic process doesn’t sit well with the unelected policymakers in Brussels.
Social Media, on the other hand, has largely celebrated the “Brexit” vote as a revolution of grassroots politics and consolidating objections about wage stagnation, immigration politics and the lack of self-governance. This rebellious timbre of the referendum has reverberated into other regions of the world where similar anti-status quo movements are gaining popularity.
For veteran market observers, this past week harkens back to the late 1970’s when the UK based, post-punk band, “The Clash” released their double album titled, “London Calling.” The album included songs about racial conflict, social displacement, unemployment and government overreach.
“No man born with a living soul can be working for the clampdown.
Kick over the wall, cause government’s to fall, how can you refuse it?
Let fury have the hour, anger can be power, do you know that you can use it”
In our view, these lyrics from the song “Clampdown” by Mick Jones and the late Joe Strummer reflect both the accomplishment of the vote and the new challenges facing the UK economy as it rebalances outside of the European Union.
Our suggestion from Monday’s report to buy GBP/USD at 1.3240 o/s hit the initial target of 1.3460, which now leaves us flat. While UK assets have outperformed this week, it’s likely more a function of month-end and quarter-end flows than an outright unwinding of potential risk. As such, we suggest selling GBP/USD at 1.3565 for an initial target of 1.3225 with a 1.3660 stop.
The EUR/USD reached a high of 1.1153 in Wednesday’s LDN session, which was just under 30 points lower than our sell suggestion from Monday. The pair has posted higher lows each day this week but seems to lack momentum. After last Friday’s bid move lower, this week’s price action is a potential bearish flag pattern. We still see scope for a move back to 1.1150 and would suggest medium-term traders can look to sell at 1.1140, or on a break of 1.1075, for an initial target of 1.0930 with a 1.1230 stop.
Our trade suggestion to buy the AUD/USD .7420 was stopped out at .7245 within a few hours of getting filled. Today’s tepid Chinese data was good enough to lift the Aussie back over the .7475 area and back into a neutral technical position. With the Australian Federal Election scheduled for this Saturday, we suggest standing on the sideline into the weekend.
The USD/JPY has traded in a relatively docile pattern with last week’s low’s near 99.50 never threatened but upticks into the 103.00 handles meeting sellers. Our trade suggestion to work bids in the 100.60/70 area weren’t filled but we still prefer the long side of the pair. Sensitivity to global equities is still a concern for the bulls, but with today’s household spending and National CPI data still trending lower, more central bank action just seems like a matter of time.
Monday’s JULY 4th US Independence Day holiday will keep today’s flows light so we suggest looking for lower levels to buy next week.
Image By Helge Øverås, https://www.helgeoveras.com/concertphoto.shtml – Own work, CC BY 2.5, https://commons.wikimedia.org/w/index.php?curid=1878380