Brexit weighs heavily on GBP, weak data for EU

Forex News and Events

Brexit mania underway

GBP recovery rally was quickly squashed despite positive headlines following UK PM Cameron’s renegotiated deal with the EU. The negative sterling sentiment was generated by news that London Mayor Boris Johnson announced his backing for leaving the EU. This move not only represents a well know populist embracing a key issue but potentially a leader to an otherwise fragmented political movement. We continue to stress that this Brexit debate has only just begun. While headlines might suggest a direction for the outcome, the result will only be known on June 23rd (or shortly after). Therefore, we would short any GBP rallies as downside is attractive as Brexit risk premia remains (despite extreme short GBP positioning). The EU referendum is a classic populist issue where logical arguments are less compelling than emotional responses. As with the current US republican presidential primary appealing to irrational fears can sway voters’ intentions. Should the pro-Brexit side become coordinated and launch a targeted passionate campaign the expectations for a Brexit will increase significantly.

Weak EU data reinforced ECB

Eurozone economic data continued to show decelerations increase the expectations for aggressive ECB policy accommodation in March. Both flash manufacturing and services PMI for February were softer than expected declining to 51 and 53 respectively. German data indicated that manufacturing fell to 50.2 from 51.9 in January the lowest level in 15 months. While still in expansion territory and indicating moderate growth they highlight an alarming downwards trend. The export oriented manufacturing side continues to decline as data from the global economy and worries over financial market volatility dominate. Combined with falling inflation outlook (and prolong low energy price effects) ECB President Draghi will be forced to act despite global misgiving on the effectiveness of policy tools (unlikely to disappointed markets for a second time). The Eurozone needs the Euro policy induced weakness to rejuvenate exports. Recent comments by ECB Vice President Vitor Constancio which highlighted the positive impact of negative interest rates on the economic recovery in terms of credit risk and employment suggest we can count on lower rates (from 0.3%). In addition the market anticipates the ECB will accelerate it bond-purchasing program from €60bn a month.

EUR/JPY - Bearish Breakout.

The Risk Today

Yann Quelenn

EUR/USD has broken hourly support at 1.1070 (04/02/2016 low) and is not golding below it. The short-term technical structure still suggests a further bearish move. Hourly resistance lies at 1.1139 (19/02/2016 high). Expected to decline. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD has broken hourly support at 1.4150 (29/01/2015 low) and 1.4081 (21/01/2015 low). The road is wide open to long-term support at 1.3657 (11/03/20009 low). The technical structure suggests further consolidaiton. The long-term technical pattern is negative and favours a further decline towards the key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY is pushing lower. The medium-term technical structure is clearly negative. Hourly support can be found at 111.86 (intraday low). Hourly resistance lies can be found at 113.39 (22/02/2016 high). Expected to further decline towards hourly support at 110.99 (11/02/2016 low). We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).

USD/CHF is riding the uptrend channel. Hourly resistance at 0.9985 (05/02/2016 high) has been broken. Another resistance is given at 1.0074 (04/02/2016 high). Hourly support can be found at 0.9876 (21/02/2016 low). Stronger support is given at 0.9847 (16/02/2016 low). Expected to see further strengthening. In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.

Resistance and Support: