This is a crucial day for the U.K. with Britain’s vote on membership of the European Union. The island nation will determine its future with or without the EU and the market is eagerly awaiting the decision. The voting booths are set to open at 7 a.m. London time, while first projections are likely to be announced during the evening hours.
The final outcome is anything but certain. Recent polls showed the ‘Remain’ camp being in the lead with 48 percent ‘Remain’ and 42 percent ‘Leave’. The pound strengthened beyond 1.48 based on the assumption of a victory for the “Remain” campaign. But beware: Sterling is moving in tandem with bookmakers’ odds, while the chances of ‘Leave’ and ‘Remain’ are equal. The sentiment can therefore change very quickly at any time.
“Bremain” scenario: Traders should bear in mind that, even in the case of a pro-EU victory, unlimited upside swings won’t be a foregone conclusion. In other words, gains in the British pound could be limited as the focus will shift to the U.K. economy and the prospects of interest hikes in the aftermath of the vote. Since the Federal Reserve will be the first central bank to raise interest rates, the attention will switch to the U.S. dollar and the prospects of further Fed tightening. This fact may discourage investors to buy the pound unlimitedly.
“Brexit” scenario: In the event of an exit from the European Union, the pound will be vulnerable to huge losses as the consequences are incalculable. The market is currently pricing out a Brexit scenario which is why the market’s reaction on unexpected surprises could be excessive.
Looking on the big picture, we see chances of an imminent trend reversal. Once the pound is able to climb above 1.4850, it could head for the next major resistance zone which we expect to be at 1.52-1.5350. Above 1.55 it could be tempting to anticipate a test of 1.60 but this would be the most optimistic forecast. However, in case of any negative headlines, the focus will be on the 1.40-support level. If sterling breaks below that level, it could easily fall towards 1.3840, 1.3550 or even lower.
Upcoming breakout? The euro traded with a tailwind, heading for a renewed test of 1.1350. In the light of the highly anticipated result of the U.K. vote traders should prepare for volatile swings in this pair. Above 1.1365 we see a higher likelihood of further bullish momentum, driving the euro towards 1.14 and 1.1440. Above 1.1470 it may head for 1.1520 and 1.1615. Bear in mind, that like the British pound, upswings might be limited as the focus will shift back to Federal Reserve rate-hike expectations in the aftermath of the vote. Extended upswings might be subject to a possible short squeeze which could be short-lived.
Below 1.1280 next lower targets could be at 1.1220 and 1.1160. Below 1.1150 the euro could drop towards 1.10 and even as low as 1.0830.
It all depends on the results of the Bexit vote and we prepare for large movements to either side. We recommend traders to trade cautiously during the day as wild swings may wipe out open trades, making trading highly risky.
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