- The sterling consolidated yesterday’s gains overnight and is set to start the European session on firm footing. It is currently testing the resistance area at around 1.47-1.4740.
- Despite the pound’s consolidating move (testing the resistance area at around 1.47-1.4740) we are erring on the side of caution and holding long GBP positions in the run-up to Thursday’s vote as the downside potential in the event of a Brexit is quite substantial
- The risk of JPY sell-off is very high given the mounting probabilities of Britain staying within the European Union. Nevertheless, it remains one of the safest trades in the event of a Brexit.
- EUR/USD is stabilising above the 1.13 threshold as a “leave” vote will send Europe’s political uncertainty through the roof
-The impact of a Brexit on the German economy would be collossal in view of the significant trading ties between both nations. A Brexit would likely cause Germany’s 2017 GDP to shrink.
- German ZEW, due to be released later this morning, is expected to print in line with May's previous figure of around 53
- Currency-wise, volatility should decrease substantially until the results of the Brexit referendum become clear and then it would take some time for markets to appraise the potential impact of this result.
The sterling consolidated yesterday’s gains overnight and is set to start the European session on firm footing. The cable is currently testing the resistance area at around 1.47-1.4740 (psychological level and previous low), sitting on its 200dma at around 1.4683. However, we would rather remain cautious, holding long GBP positions as we get closer to Thursday’s vote simply because of the magnitude of the downside potential in the event of a Brexit. On the downside, a short-term support can be found at 1.4454 (Fibonacci 38.2% on the last 4 days rally).
The Japanese yen was the biggest loser on Tuesday, losing 0.42% against the USD dollar, 0.70% against the Australian dollar and 0.60% against the single currency. In spite of today’s recovery the worsening risk sentiment of the last few days has boosted the Japanese currency to multi-year highs with USD/JPY hitting 103.55 on Thursday last week. CFTC data showed that speculative net long JPY positioning continued to increase substantially during last week, reaching 40% of total open interest. The risk of JPY sell-off is therefore very high given the mounting probabilities of Britain staying within the European Union but it however remains one of the safest trades in the event of a Brexit.
EUR/USD got some colour back as it stabilised above the 1.13 threshold. Developments in Brexit polls also had a strong impact on the pair as a “leave” vote will send Europe’s political uncertainty through the roof, as investors turn to safe haven assets. This morning the single currency is trading at 1.1340 against the greenback, up from 1.1302 in the early Asian session.
In the equity market, equities were on fire yesterday as the “leave” seemed to have lost traction. The Euro Stoxx 600 surged 3.30%, the Footsie was up 3.04%, while the Swiss performance Index rose 2.39%. In the US, the S&P 500 was up 0.58%, the Nasdaq 0.77% and the Dow Jones 0.73%. Overnight, most Asian indices followed Wall Street and London’s lead and moved deeper in positive territory, with the exception of mainland Chinese stocks. In Japan, the Nikkei was up 1.28%, while the broader Topix index rose 1.15%. In China, the Shanghai and Shenzhen Composites were down 0.40% and 1.10% respectively.
Yann Quelenn, market analyst: “German ZEW expected to drop: Financial markets are closely scrutinising German economic indicators and will be paying close attention to the ZEW, due to be released later this morning. This will provide insightful economic sentiment for June, including the current situation and expectation figures. ZEW Current situation data is expected to print in line with May's figure - around 53. One year ago, the indicator was above 70. Now, as it approaches the 50 mark, economists grow increasingly pessimistic.
The ZEW expectations is in a clear downward trend. In general, sentiment remains negative and the European outlook is clearly uncertain, especially due to the Brexit referendum this Thursday. The impact of a Leave vote on the German economy would be colossal in view of the trading relationship between both nations. A Brexit would likely cause next year German’s GDP to shrink. To add to the uncertainty, the global economic slowdown as well as the efficiency of the ECB's monetary policy are also of concern. Currency-wise, volatility should decrease substantially until the result of the Brexit referendum becomes clear and then it should take some time for markets to appraise the potential impact of this result.” ---
Today traders will be watching the ZEW survey from Germany; an interest rate decision from Turkey; mid-month inflation data from Brazil; Draghi’s speech before the European parliament; Yellen’s testimony before a Senate panel, Fed’s Powell will also speak in New York.