GBP/USD: Brussels bombing boosts Brexit butterflies

By now, you’ve no doubt heard about today’s horrifying events in Brussels, and we wanted to start by saying that our thoughts go out to the bombing victims and their families. Not surprisingly, today’s events have overshadowed the traditional day-to-day movements of the markets and are leading to a big risk-off move in global equities, as well as safe haven demand for assets like gold, as my colleague Fawad Razaqzada noted earlier.

Taking a look at the medium-term political picture, atrocities like today’s bombing are likely to increase the simmering anti-immigration sentiment in the European Union and could have a big impact on June’s UK European Union Referendum (colloquially, “Brexit”) in particular. A recent Telegraph poll found that the UK citizens’ greatest fear about voting to remain in the EU was “uncontrolled/increased immigration” and in many ways, the vote is being framed as a decision on immigration, which many voters associate with terrorism after the November attacks in Paris.

By contrast, traders have been far more concerned with the potential economic impact of a pro-Brexit vote, and rightly or wrongly, events like today’s increase that likelihood. As a result, the pound is selling off sharply, trading lower by approximately 150 pips since this morning’s attacks. The initial reaction to the attacks has likely run its course, but the next shoe to drop will be the reactions of politicians and citizens. If more prominent politicians try to capitalize on the populist anti-immigration sentiment by endorsing the “Leave” campaign or opinion polls show that the populace is leaning toward a leave vote, the pound could fall further in the coming days.

On a technical basis, the chart remains in a short-term uptrend, though both the MACD and RSI indicators are showing signs of rolling over. If bears can maintain the momentum, the next support levels to watch will be the Fibonacci retracements of the March rally at 1.4175 (50%), 1.4090 (61.8%), 1.3980 (78.6%), and even the “Leap Day Low” around 1.3850. On the other hand, if there’s no big wave of anti-immigration sentiment (and no further attacks), the pound could recover back toward the 1.44-45 region where it started this week.