Brexit Is The Big Elephant In The Room Urging The Fed To Adopt Slower Rate Hike Path

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Dear Traders,

The market reaction to the FOMC statement was more muted than expected. While the cable maintained a daily price level around the 1.42-mark, the euro surged to a high of 1.1298 after the Federal Reserve held interest rates steady. While the decision to leave rates steady in June was widely expected, Fed chair Yellen declined to provide any guidance on the timing of future rate increases during her press conference. However, the Fed has taken a more cautious stance with regard to next week’s referendum in the U.K., a decision that “could have consequences for economic and financial conditions in global financial markets (…) and in turn for the U.S. economic outlook”, Yellen said. At present, the Brexit vote is the greatest uncertainty in the market.

In the light of a slower approach to interest-rate increases, the U.S. dollar weakened but losses were limited as the dollar is profiting from its function as a safe haven amidst all uncertainties. Traders should bear in mind that as long as the market is biased by the upcoming Brexit vote we might not see any sustained movements in the currencies. Large investors are likely to wait until after the big event in order to take new positions.

Today, the focus shifts to the U.S. Consumer Price report scheduled for release at 12:30 UTC. In case of any unexpected surprises the dollar will respond accordingly. Apart from that most important piece of economic data, the Bank of England is scheduled to announce its monetary policy decision at 11:00 UTC but no changes are expected, making it a non-event for traders. Before the BoE interest rate decision, U.K. Retail Sales are due for release at 8:30 UTC which could have a minor impact on the pound.

From the Eurozone we have Consumer Prices scheduled for release at 9:00 UTC but if the report is in line with the expectations, it will not have a significant impact on the euro.

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Sterling Traders Benefit From High Volatility Environment

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Dear Traders,

The pound sterling is currently the most volatile currency and traders’ efforts were rewarded once again: As expected in yesterday’s analysis, some of the GBP’s recent losses have been corrected due to an oversold situation. Consequently, our long-entry has proved to be successful, providing traders a nice profit on Monday. The pound rejected the 1.4330-level and dropped back below 1.42. Given the fact that the ‘Leave’ Campaign gains ground against the ‘Remain’ before next week’s referendum, traders should generally expect further losses in the GBP. A next lower target could be at 1.40, whereas corrections might be limited until 1.4260. U.K. Consumer Prices are scheduled for release at 8:30 UTC and even if the report comes in with an uptick in CPI, the pound is likely to remain under pressure.

The euro tested the 1.13-barrier and held steady around that level amidst uncertainties surrounding the Brexit vote and the Federal Reserve’s rate decision. With no major important economic reports scheduled for release from the Eurozone, the euro is expected to fluctuate within smaller trading ranges. The focus will rather be on the U.S. dollar and important U.S. data such as Retail Sales due at 12:30 UTC. Retail Sales are expected to show a slower growth in May and this expectation could weigh on the dollar before the report is due for release.

We currently see a higher likelihood for upcoming bullish momentum, driving the EUR/USD towards 1.1390. A crucial resistance level is seen at 1.1330/40 which must be significantly breached to the upside in order to reinvigorate fresh bullish potential. If the euro is unable to break above 1.1305 we will shift our focus to the 1.1270-level. Below that level we expect the euro to fall towards 1.1240 and 1.1215.

Chart_EUR_USD_Hourly_snapshot14.6.16

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UK Referendum Cast Its Shadows Before – Investors Are Turning To Safe Assets

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Dear Traders,

We welcome you to a new trading week and it is getting more and more exciting as we are approaching the U.K. referendum next week, which will maintain its grip on the markets. The U.S. dollar appreciated against the euro and British pound last Friday as it benefited from safe-haven flows in the run-up to the U.K. vote. The British pound broke below 1.43 as anxiety about a potential Brexit considerably reduced the demand for sterling. While the Yen benefits most from safe-haven flows, the appetite for U.S. dollars mainly hinges on the Federal Reserve’s tightening cycle. Despite a busy economic calendar this week, the main focus will therefore be on the FOMC rate decision on Wednesday. No one expects the Fed to raise interest rates this month but Janet Yellen’s press conference could set the tone of the debate on further tightening in 2016. Apart from the FOMC announcement, the June 23 referendum is casting its shadows before: A survey published last Friday showed the ‘Leave’ camp being in the lead. U.K. Consumer Prices are scheduled for release on Tuesday, while the Bank of England will announce its monetary policy decision on Thursday. However, overshadowed by Brexit concerns, the BoE announcement is going to be a non-event for traders.

From the U.S. we have Advanced Retail Sales (Tuesday) and the CPI report (Thursday) scheduled for release. All in all, it could be a busy week for traders and as long as there is volatility in the markets, there will be opportunities for larger gains.

GBP/USD

The cable broke below its crucial support at 1.43 and could be headed for a test of 1.41 and 1.4050 in a next step. Looking at the daily chart we see a current downward channel which suggests further bearish momentum towards the lower bound at 1.4080. But be careful: The pound fluctuates in an oversold territory and could now be vulnerable to volatile upswings. Thus, pullbacks towards 1.4350 and 1.44 are not unlikely.

Chart_GBP_USD_Daily_snapshot13.6.16

From the Eurozone there will be no major economic reports on the calendar. Thursday’s Consumer Price report could have a minor impact on the euro but how the EUR/USD will trade this week, will mainly hinge on the performance of the greenback and safe-haven demand. The euro marked a current support at 1.1230. With a break below 1.1225 it could extend its losses towards 1.1195 but we expect bearish momentum to be limited as the currency pair could be vulnerable to some pullbacks now. We see a current resistance at 1.13/1.1320.

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Euro Struggles With 1.14 While Sterling Went Into A Tailspin

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Dear Traders,

The European Central Bank began buying corporate bonds on Wednesday and the euro climbed above the 1.14-mark. However, the slight appreciation of the euro can rather be attributed to the shift in expectations for Federal Reserve tightening. The U.S. dollar weakened as Investors see only a 58 percent chance that the Fed will raise rates by year-end. The greenback’s recent weakness contributed markedly to the increase in the euro but in general the dollar remains a buy on pullbacks as the Fed remains on track to raise interest rates in 2016.

The movements were, however, limited in the currency market. The euro rose merley 10 pips above the 1.14-barrier whereas it marked a current support at around 1.1350. ECB President Mario Draghi is scheduled to speak in Brussels at 7:00 UTC, which could impact on the euro.

From the U.S. we have Continuing and Initial Jobless Claims due for release at 12:30 UTC, but these reports are not expected to have a significant impact on the USD.

The British pound rebounded from a high at 1.46 as Brexit risks continue to put pressure on the currency. If sterling breaks again significantly below 1.4495, we see a greater chance of a renewed bearish move towards 1.4440 and 1.4385. However, above 1.4540 gains could be limited until 1.4580.

The only second-tier economic data from U.K. will be Trade Balance figures due for release at 8:30 UTC.

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Uncertainties Before U.K. Vote Result In Massive Widening Of Volatility

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Dear Traders,

The biggest story was the sharp rise of the British pound early this morning, which once again demonstrates the enormous potential despite uncertainties surrounding the U.K. referendum. Only this morning we saw a higher likelihood for upcoming bullish momentum if the cable was able to break above 1.4480 but the pound came up first with its strong upward move before we published today’s analysis. The British pound has soared within seconds by 180 pips towards a high of 1.4661 but was not able to hold onto its huge gains. The currency pair remains vulnerable to high-volatile swings and traders should be prepared for huge breakouts at any time.

Yellen’s speech had only little impact on the market’s sentiment as she avoided addressing the timing of another interest-rate increase. While her comments were less hawkish this time, omitting a previous phrase that an increase would likely be “appropriate in the coming months”, the Fed is still on track to raise rates this year. Yellen described the latest labor-market report as “disappointing”, but also pointed to the increase in average hourly earnings, which is seen as one of the few encouraging elements of the report.

In a nutshell, a June move is off the table and the Federal Open Market committee is now expected to keep rates on hold when they meet next week. Also, the chances of a July hike have fallen substantially after the latest labor-market weakness and Yellen’s speech. The next major risk event will now be the U.K. referendum and investors are likely to remain risk-averse in the run-up to the important vote, a fact that could depress the market environment in the near-term.

The U.S. dollar was little changed yesterday and this could possibly last for some time as there will be no major economic reports this week, which could help determine the market’s direction. Traders should therefore not expect too much, take profits even at smaller targets and do not invest too much.

The only second-tier report from the Eurozone today will be revisions to the first-quarter GDP, due at 9:00 UTC. This report is not expected to have a major impact on the euro. The EUR/USD marked a recent trading range between 1.1392 and 1.1325. Based on that range we will focus on price swings above and below these bounds, while we expect the 1.1409-level to act as a short-term resistance. Above 1.1415 a next bullish target could be at 1.1445. However, a break below 1.1325 could drive the euro towards 1.1290 and 1.1260.

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Massive Increase In Volatility: Sterling Jumps 180 Pips This Morning

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Dear Traders,

Watch out for extreme volatility in the British pound with only two weeks to go before the U.K. referendum. Today’s sharp rise demonstrates the enormous potential despite uncertainties surrounding the U.K. vote. Only this morning we saw a higher likelihood for upcoming bullish momentum if the cable was able to break above 1.4480 but the cable came up first with its strong upward move before we published today’s analysis. The British pound has soared within seconds by 180 pips towards a high of 1.4661 but was not able to hold onto its huge gains. The currency pair remains vulnerable to high-volatile swings and traders should be prepared for huge breakouts at any time.

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Brexit Polls Dominate The Market

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Dear Traders,

At present, nothing affects the market more than any new Brexit polls and the associated risks and fears determine the price action in both major currency pairs. While any incoming economic data, whether it is good or bad, is currently taking a back seat, the market seems to be only focussed on the recent U.K. referendum polls. Only yesterday, we learned how sensitive market participants are to shifts in opinion polls, whereby an online poll put the Brexit camp ahead, in contrast to a previous poll showing a lead for the ‘Remain’ camp. As stated in yesterday’s analysis, traders should expect more volatility in the run-up to the U.K. vote which is why both currency pairs remain vulnerable to wild swings.

The euro dropped on Brexit risks, but remained confined to a narrow trading range between 1.1173 and 1.1122 on Tuesday. The performance of the EUR/USD was therefore muted and unfortunately did not provide any sustained profit for day traders. However, the recent downward channel is still intact with a current resistance line at 1.1163 and on the other hand, a support line at 1.1073. The German Manufacturing PMI is scheduled for release at 7:55 UTC but we do not expect this report to have a major impact on the euro.

The British pound fell sharply as two ICM opinion polls showed the Brexit camp ahead. Short-trader’s efforts thus paid off and we were able to pocket a nice profit on the last trading day of May. Given that bearish momentum, we will now focus on a break below the recent support at 1.4442 in order to sell the pound towards 1.4405 in a first step. If sterling drops significantly below 1.4385 we see a next support at 1.4340. A current resistance is seen at 1.4522. The U.K. Manufacturing PMI is due at 8:30 UTC and economists forecast an uptick in May. Whatever the case, Brexit concerns will continue to determine the performance in the pound.

From the U.S. the most important piece of economic data will be the ISM Manufacturing Index, scheduled for release at 14:00 UTC. Any unexpected outcomes should affect the dollar accordingly.

Last but not least, the Federal Reserve releases its Beige Book at 18:00 UTC.

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