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    The Week Ahead: Week of June 17, 2016


    Technical Developments:

    • GBP/USD has rebounded after a sustained fall, but could see more pressure next week ahead of the UK’s EU referendum.
    • EUR/JPY continues to be pressured as the euro remains weighed down and the yen benefits from safe haven flows.
    • USD/JPY has broken down below major support, hitting a new long-term low as the Fed remains dovish and the Bank of Japan opts for inaction a week before the scheduled Brexit vote.
    • EUR/USD: All about Brexit vote next week


    GBP/USD broke down a week ago below a key uptrend line that extended back to February's multi-year low of 1.3835. This past week, as the risk of a Brexit outcome continued to weigh on the pound in the run-up to the EU referendum, the currency pair followed-through on that drop to closely approach a key downside target at the 1.4000 psychological support level. Price rebounded off that support on Thursday as speculation that the Remain camp would gain more support after the tragic killing of pro-EU politician, Jo Cox. Despite this bounce, with the EU referendum less than one week away, risk of a potential Brexit should continue to place pressure on GBP/USD, possibly extending the currency pair's heavily-entrenched bearish trend. Currently, the downside target continues to be at the noted 1.4000 level. On any subsequent breakdown below 1.4000, further losses could open the way towards the 1.3800 level, last approached at the noted February low. Of course, in the event of an actual Brexit outcome, the downside for GBP/USD could be substantially worse. In contrast, a vote to remain will take the event risk off the table and likely lead to a considerable relief rally and alleviation of pressure on both sterling itself as well as the GBP/USD currency pair.




    The run-up to the referendum within the next week could likely see additional pressure on the euro and strength for the safe haven yen, which could open the way to significantly further losses for EUR/JPY. Thursday’s BoJ-driven plunge for the currency pair prompted a clean breakdown below the key 119.00 support level, which had previously been a major downside target since early June. The breakdown followed through to hit its next downside target at 116.00 support, establishing yet a new three-year low, before rebounding and paring some of those losses. As of Friday, EUR/JPY continued to show weakness, falling once again towards the noted 116.00 level. With any re-break and sustained trading below 116.00, the next major downside targets are at the 114.00 and 111.00 support levels. After the referendum, trading direction and levels will be dependent upon both the actual outcome of the vote as well as possible actions by Japan if a pro-Brexit result prevails and the yen strengthens substantially in response.




    The US dollar has been in a severely weakened state against the Japanese yen recently, due in part to the sharp decline in expectations for a near-term Fed rate hike and a dovish FOMC statement this past week. At the same time, the Japanese yen has continued to strengthen largely due to safe-haven buying ahead of next week’s Brexit risk event as well as the Bank of Japan’s inaction at its monetary policy meeting this past week. As a result, USD/JPY broke down below a major support level at 105.50 this past week and established a new long-term low at 103.54, a level that has not been seen since August of 2014. In the event of further yen-strength ahead of next week’s Brexit risk event, further downside follow-through below the noted 105.50 level could open the way for more USD/JPY losses towards the next major downside targets at the 103.00 and then 101.00 support levels.




    The EUR/USD huffed and puffed but ultimately made little progress on the week as Brexit concerns kept the EUR bulls on the side-lines and helped to offset USD selling pressure on the back of a more dovish-than-expected Federal Reserve. Economic data relevant to the EUR/USD is somewhat lighter next week, with the exception of German ZEW Economic Sentiment (Tuesday), Eurozone Flash PMIs (Thursday) and German Ifo (Friday), as well as some second-tier US macroeconomic pointers. But that doesn’t mean volatility will be any less.

    In fact, volatility could spike in the days leading up to and during the EU referendum on Thursday, providing plenty of short-term trading opportunities for FX traders. A lot hinges on the outcome of this vote, as we have discussed below. We think that a remain outcome could send the EUR/USD rallying towards the 1.1450-1500 area, while a vote to leave could see the world’s most heavily-traded pair drop back towards the March 2016 lows of around 1.0820/50 area at the very least.

    Scenario 1: UK public votes to stay in the EU

    If the UK public votes to stay within the EU then surely the pound will rally on relief and short-covering, which should pressurise the EUR/GBP cross. But as far as the EUR/USD pair is concerned, the response will not be that straight forward. On the one hand, a stay vote is deemed positive for the EU economy as it is for the UK. Thus, in this scenario, one would think that the EUR/USD will rally. On the other hand, however, a vote to stay could also lead to renewed calls for a rate hike in the US, for the Federal Reserve has suggested that Brexit is among the concerns holding the FOMC back from increasing interest rates again. So the EUR/USD’s response in this potential scenario may well be positive initially, which could see price rally to the key 1.1450-1500 resistance area (see the technical details, below). But whether the potential rally will last long or go decisively beyond 1.1500, we are not so sure. After all, we remain fundamentally bearish on the EUR/USD exchange rate given the growing divergence of monetary policy between the Eurozone and US central banks.

    Scenario 2: UK public votes to leave the EU

    However, if the unthinkable happens and the UK votes to leave the EU, the EUR/USD’s response will likely be a swift sell-off, as this scenario is still not the base case for many analysts and traders alike and the risks may therefore be under-priced. That being said, the likely sell-off will probably not be as bad for the EUR as it may well be for the GBP since the UK economy relies more on the EU for its exports than the EU does on the UK for its overseas shipments. Still, the USD is likely to find some safe haven flows, which should ultimately pressurise all the USD pairs, including the EUR/USD.

    Technical outlook

    Ahead of the EU referendum, let’s remind ourselves about the fact that the EUR/USD is effectively stuck inside a long-term consolidation range with repeated failures around 1.15, as highlighted on the weekly chart. With that in mind, traders should treat any short-term rallies cautiously, especially around the 1.1450-1500 key resistance area. Indeed, many speculators who are on the side-lines for now and bearish on the EUR/USD exchange rate will no doubt be looking to fade the rallies there, too.

    However, within the consolidation, price action has been mostly bullish since the end of last year with the EUR/USD putting in a few higher highs and higher lows. More recently, at the end of May, the EUR/USD formed a large bullish engulfing candlestick pattern on its weekly chart as the buyers stepped in to defend the now-rising 55-week and 200-day moving averages and a bullish trend line around 1.1100. But in recent weeks, that bullish momentum appears to have faded once again and as we go to press the EUR/USD was once again testing this rising trend line, now at around 1.1200 (see the daily chart). However as price is still holding above low of that engulfing candle (1.1100), the bulls appear to be just about edging it in terms of control.

    So, for as long as this 1.1100 level holds as support, the bulls will be hopeful that at the very least the EUR/USD will go for yet another test of the noted 1.1450-1500 area before it decides on its next move. A potential break below 1.1100 however could pave the way for another move towards the lower end of the long-term range, near 1.0500, with an intermediate long-term support (and therefore a bearish target) being at around the 1.0800/50 area.





    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.

    From a financial market standpoint, the tragedy has boosted speculation that more support could now be shifting towards the Remain camp, after the past couple of weeks of polling generally showed the Leave camp assuming the lead. Despite this tentatively shifting speculation, however, it is clear that volatility in the polling as well as in the markets will continue to be exceptionally high in the run-up to the referendum. It is also clear that the actual outcome of the vote could very well go either way – Remain or Leave.

    This volatility is being displayed distinctly in the most potentially-affected markets, including currencies. The British pound and euro, in particular, have been pressured heavily since the beginning of June, as UK polls began to show that those who leaned toward a UK departure from the EU were gaining momentum over those who wished to remain. These polling results represented a sharp reversal from previous months, when the Remain camp had consistently commanded a relatively comfortable lead.

    At the same time that the Leave camp was closing the gap and gaining ground during the first half of this month, the exceptional market risk presented by a possible Brexit outcome boosted safe haven assets and currencies like gold, the Japanese yen, and the Swiss franc. In the case of the yen, the Bank of Japan decided to refrain from implementing additional monetary easing measures on Thursday. This led to a further sharp surge for JPY as the central bank made it clear that it was not going to stand in the way of yen strength for the immediate time being. With that said, however, if a Brexit outcome actually prevails and the safe haven yen surges much more in response, Japan could very well be in the position to intervene in attempts to drive down its currency. The same potentially holds true for the Swiss National Bank, which also left its monetary policy stance unchanged on Thursday, as it could act to halt any excessive appreciation of its safe haven franc.

    While the noted tragedy surrounding Jo Cox may have contributed to increased support for the Remain camp and a tentative lifting of pressure off both the pound and euro for the time being, the risk of a Brexit outcome still remains real and substantial. This risk could be reflected next week ahead of the referendum outcome in resumed pressure on sterling and the euro, along with continued support for safe haven currencies like the yen and franc.

    At the time of this writing on Friday afternoon, European equity markets looked set to close the week on a more positive note but still sharply lower. Just 24 hours ago, Brexit concerns, central bank inaction and falling oil prices were dominating the headlines and stocks were tumbling. However, Thursday’s tragic killing of Labour MP Jo Cox saw both Brexit and Leave camps suspend their campaigns. This led to speculation that the Leave camp will now lose support and the bookies cut their odds for Brexit. The pounds and the FTSE 100 index, and stocks in general, staged a short-covering bounce. However this does not necessarily mean that those who have already made up their minds will change how they will vote. So, it is set to go down to the wire and it will be a very close call indeed.

    According to flows tracked by EPFR, investors have been pulling out of UK stock funds for eight consecutive weeks now, undeniably because of Brexit concerns. Almost $3 billion has now been pulled during this period. In the week to June 15 alone, $1.1 billion was withdrawn. The pace of withdrawals have been among the worse in recent years. Unsurprisingly, this has had some negative impact on the FTSE 100 and the stock market in general.

    But unlike the pound, for stocks, it is not just Brexit concerns that are weighing heavily on the market sentiment at the moment; other factors are at work, too – such as concerns about the impact of a US rate increase this year, weak growth in the Eurozone and China, and renewed weakness in oil prices. Indeed, it could be that even if the UK public votes to remain in the EU, that the markets may stage a very quick bounce before falling once more. Conversely, a Brexit vote may be mostly priced in, meaning that in this potential scenario, stocks could fall sharply for maybe a couple of days before bouncing back.

    So, the key takeaway point from what we are trying to say is this: don’t get complacent, especially when it comes to trading a major macro event like this. How do you know that all or most of the market participants are thinking the same way as you do – and not only that, how do you know they will act on their thoughts by trading that way? Furthermore, even if most market participants do what you think they will, how do you know they won’t take quick profits on their positions, which could reverse the trend quickly?

    Don’t always believe the hype: remember the Scottish referendum?

    Indeed, if history teaches us one thing, it is this: don’t always believe the hype. Traders may recall that in September of 2014, in the lead up to the Scottish referendum, the FTSE began to drift lower after reaching a major resistance zone around 6850-6900 area (see figure 1, below). At the time, we heard so many people suggesting that if Scotland were to leave the UK, the FTSE would plummet and that if it remained part of the UK, the index would break to new all-time highs and stage a massive rally. Well, as it turned out, Scotland voted to remain in the UK and lo and behold, the FTSE staged a minor relief rally. BUT a major sell-off then followed after the index re-tested that 6850-6900 area, before dropping a massive 800 points or 11.7% by the very next month from that peak to the low.

    Technical outlook

    Now, looking at the current chart, one can see, in figure 2, that the FTSE tested the prior support area of 6040-6055, now resistance, before pulling back slightly on Friday. As we go to press, the index was still holding below this area but looked set to close higher on the day. Obviously a lot will depend next week on the outcome of the vote, but for now, the path of least resistance is to the downside. The resistance levels to watch are shown in red, support in blue. Among the support levels, the area around 5850-5880 is where a couple of Fibonacci levels converge with an AB=CD pattern. The index got very close to this region on Thursday before bouncing back. This area should be watched closely next week for a potential bounce. However if the index breaks through this area, the next stop could be at 5770 or even 5600 – the latter could easily be reached, and indeed breached, in the event of a Brexit vote. Meanwhile, in the event of a remain vote, the index could climb all the way back to its bearish trend line before deciding on its next move, although this will depend on where the index will be trading before the outcome is announced.


    Source: Please note this product is not available to US clients.


    Source: Please note this product is not available to US clients.


    Safe haven gold pulled back sharply on Thursday after its recent rally. This was partly in response to risk assets finding some much-needed support as Brexit concerns receded a little (see the equities section for details). The precious metal is likely to correlate inversely with stocks next week as the focus will no doubt be on Britain’s EU referendum. But correlations don’t always hold, especially with gold also moving inversely with the dollar. So, fresh incoming economic data from the US should cause gold to move independently of stocks from time to time next week. From a technical point of view, the metal’s failure above the prior swing high of around $1300/3 is a concern for bullish speculators. Although there has been no follow-through in the selling pressure on Friday, if price moves below Thursday’s candle at $1277 next week then we may see further follow-up momentum selling pressure. The bulls will be hoping that the prior resistance level of $1300/3 would be cleared – if so, the aforementioned bearish pattern would then become invalid. In this potential scenario, gold could extend its advance towards the Fibonacci extension levels shown on the chart. But make no mistake about it, the Brexit vote will have a major say in gold’s near-term price action.

    Crude oil

    Oil prices bounced back on Friday first and foremost due to profit-taking after falling for six straight days, and also because of the small but general improvement in risk sentiment since Thursday afternoon (see the equities section for details). The sellers had stepped in when oil prices had gone up too far, too fast above $50. At the moment there is a lot of noise in the oil market, as not many people are sure what’s really going on. Ultimately, however, the market has tightened as demand remains strong and US supply has fallen somewhat. Shale oil producers are only likely to step up production once again if we get closer to $60 or $70 a barrel, so we could see prices consolidate inside $45 to $70 for much of this year. From a technical stand point, WTI has broken out of its bullish channel but has bounced at key support and the 50-day moving average around $46. If it breaks below here, the next stop could well be around the next shaded area on the chart: $42-43. Meanwhile resistance is seen between $47.75-48.50 (old support and back side of trend line). A break above here could expose the $50.00-$50.90 area for a re-test.




    Source: Please note this product is not available to US clients.

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