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EU Referendum To Rule This Week’s Market Moves

During the week of heightened anxiety to see how the Federal Reserve would reflect to recently downbeat NFP number, observers got disappointment as the US central banker cut its employment outlook and talked down the rate-hike signals while promoting the Brexit fears. Moreover, weaker Inflation, coupled with six FOMC members projecting only one rate-hike in 2016, against previously one member expecting the same, dragged the US Dollar Index (I. USDX) towards negative weekly closing for the second time in previous three weeks. The EUR and GBP remained strong against the US Dollar due to a murder of UK lawmaker, favoring the Bremain campaign, followed by a two-day suspension of campaigns for EU referendum in UK. The JPY and Gold rallied further as investors sought refuge before this week's EU referendum while the AUD and NZD helped with commodity basket and the Crude, together with the CAD, were dragged down on weekly closing basis.

As we come closer to the June 23 EU referendum polls when U.K.'s 65-million population will take the historic decision of whether to remain in EU or not, all eyes are stick on the outcome which is likely to shake the global financial markets. In addition to the referendum poll, testimony by the US Fed Chair, headline PMIs from EU & Germany, US housing market numbers and the Durable Goods Orders are some other important events that can continue providing intermediate trading opportunity to market players.

All Eyes On June 23-24

Ever since the UK Prime Minister, David Cameron, announced in late-February that the Britain will hold a referendum voting on whether to remain in EU or not, global markets remained cautious for one of the BIG moves. Even if the "Brexit" supporters (those who wish to pull the UK out of EU) were mostly leading until mid-June, murder of a British law maker, Jo Cox, an opponent of Brexit, stopped all campaigns for two day until Monday and provided a surprise relief to the EU as recent polls showed around 30-40% chances of the Britain votes for leaving the EU during June 23 referendum. The UK will decide its future with European Union in a referendum voting on Thursday, June 23 till 10 p.m. London time while the final results will be out on early Friday.

As per Bloomberg news, there are only 37% chances on Monday that the global economy will see a "Brexit", the same helped Great Britain Pound (GBP) to extend its previous two-day's rally, together with an upswing by the EUR. However, the broader sentiment is largely undivided between the Brexit and Bremain, making the Friday's result too close a call to predict.

What if "Brexit" Rules?

As the UK is the first member state to ever hold a national referendum to exit from the European Union, exact effects on the Britain's and the EU economy are hard to predict. However, if the UK votes for Brexit, it will then have to plunge into lengthy conversation with the EU and start building trade-links with the union and the rest of the world. As the talks will take more than a year, the UK will continue to abide by EU treaties but won't be able to vote on any decisions for the union. There are also speculations that the UK PM might also be forced to step-down, in worst-case scenario, as Brexit would lead to slowdown of economic activity between EU & the UK and might lead to a blackout period for the nation before it settles down. Further, the Bank of England, in its latest meeting, also said that the Brexit could lead to recession in UK and some other leading global financial institutions, like Federal Reserve, IMF and World Bank, also expected pessimism if the nation decides to leave EU. Hence, Brexit would be a harsh call for the global economy, including the UK & EU, which will result in a EUR and GBP plunge while extended strength for the JPY's safe-haven demand.

On a course of "Bremain"

Should the UK votes to remain in the EU, as largely expected, there will be a win-win situation. To the EU, it wouldn't lose its strong component while the UK will benefit from its negotiated deal during February with EU. The UK Prime Minister, in his negotiation with EU during February's summit, managed to secure a deal wherein the Britain gains a power to stop the payment to EU immigrants working in UK if the same are straining public services or employment market. It also enabled the UK not to join Euro and not bear the burden of bailouts. Moreover, the Britain also secured the liberty of not being committed to political integration into the European Union and reserves the right to provide UK citizenship to non-UK people, including those who have married to British people. So, the UK will be on the upper hand if the "Bremain" campaign wins, which in-turn would help the GBP to register noticeable up-move while the EUR would also benefit for a while.

To sum up, as both the sides of the referendum are strong enough to make the Thursday's poll results unclear, the risk-free assets, such as JPY and Gold, to say the AUD a bit, can continue on their upward trajectory ahead of the event results. Post results, Brexit can fuel these safe-havens further on the north-side and can punish the GBP and EUR by giving a counter strength to the US Dollar while "Bremain" will be helpful for the GBP and the EUR while hurting the JPY, Gold and the US Dollar during short-term.

Fed Chair's Testimony For The USD Traders To Watch

Following her failure to please the USD traders, even after mentioning that the Fed remains on the course of gradual rate-hikes, the US Federal Reserve Chair, Janet Yellen, gets another chance on Tuesday and Wednesday, during her testimony, to shake the hawks a bit. In addition to the testimony, Wednesday's Existing Home Sales, Thursday's New Home Sales and the Durable Goods Orders, up for Friday, are some other US details that are worth observing.

Considering the slew of recent downbeat US readings, the Fed Chair might have little to say that can maintain the optimism of USD traders. However, she could pinch a bit up for the Manufacturing improvement and better than forecast Core CPI portraying improvement in world's largest economy with no consensus favoring any signals for rate-hike.

Looking at the forecasts relating to other details, Existing Home Sales are likely maintaining its up-move towards registering the highest levels in a month, to 5.53M against 5.45M prior, while the New Home Sales might dip from its more than eight years high level of 619K to 561K. Further, the Durable Goods Orders might extend its previously revised -0.8% downtick and the Core Durable Goods Orders to slowdown to 0.1% growth versus 0.5% upwardly revised prior.

Given the Fed Chair has fewer positive points to say that the US economy is safe-enough and can go ahead on its gradual rate-hike path, a dovish comments by the policymaker can drag the USD further towards south. Moreover, weaker Durable Goods print, coupled with the victory of "Bremain" campaign might further add into the weakness of greenback.

EU Flash PMIs & Canadian Sales Numbers Are The Rest To Observe

While speculations of EU referendum results can continue governing the EUR moves, EU and German ZEW Economic Sentiment numbers, together with Flash Manufacturing and Services PMIs, might give rise to intermediate trading opportunities for those targeting EUR.

Tuesday's ZEW numbers signal that the EU and Germany are both facing a cut in economic optimism as EU ZEW Economic Sentiment is likely dipping down to 15.3 from 16.8 while the German number may test 5.1 mark from 6.4 prior. On Thursday, Flash PMI readings of EU and German Manufacturing and Services sectors also indicates economic weakness as all the four numbers bear the forecast of lesser than previous mark. The EU Manufacturing PMI is expected to print 51.4 against 51.5 prior while the Services PMI can show 53.2 versus 53.3 prior; moreover, the German Manufacturing index is likely to remain unchanged at downwardly revised 52.1 and the Services PMI can signal 55.0 number against 55.2 prior.

As all the scheduled data-points, either from EU or Germany, portrays a weaker picture of the regional economy, actual readings matching with the forecast can burn the scars of the EUR in case of "Brexit".

With the recent upswing in Crude prices, mainly due to the optimism that the UK will remain in EU and the continued supply of energy will remain intact, the Canadian Dollar (CAD) recovered some of its recent losses. However, monthly details of Wholesale and Retail Sales, up for Monday and Wednesday respectively, can become important for the CAD traders. Both the sales figures are likely to reverse their previously negative marks as the Wholesale sales is expected to print 0.2% growth and the Retail Sales are likely grew by +1.0% against their previous declines of -1.0%. The Core Retail Sales may also print +0.8% figure compared to -0.3% prior.

Given the "Bremain" wins, the Crude, main export for the Canada, is likely to extend its advance, helping the CAD which might be capable of enjoying upbeat sales figures. However, in case of "Brexit", a third weekly rise in US rig counts can drag the energy prices down, which in-turn may trigger weakness of the Canadian Dollar.

Follow me on twitter to discuss latest markets events @Fx_Anil.

Tuesday, 21 Jun, 2016 / 3:29

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