The outcome of the EU referendum was seen as a shock by most market watchers, as the UK voted to exit the union by a slim margin. Prior to this, online and telephone surveys conducted by various agencies had been showing mixed results, with the last of the opinion polls suggesting a slight lead in favor of staying in the UK leading up to the release of the first few results.
This optimism allowed the British pound to hold on to its gains and even break higher against some of its forex peers during the day of the referendum. But when the official numbers started trickling in from the regional polling centers, it became apparent that a Brexit was indeed possible.
A look at the 15-minute chart of GBPUSD during the release of the results shows how the lead and market sentiment have shifted throughout the day. In the first few hours, the pair would pop up whenever the running tally suggested a lead in favor of staying in the EU but the drop would be significantly sharper whenever the lead swung in favor of exiting.
As soon as several mathematical models suggested that it would be statistically impossible for the “remain” camp to make a comeback, GBPUSD made a straight dive from just beneath the 1.4600 handle all the way below 1.3400. Price consolidated briefly around the 2009 lows around 1.3500 but the bearish momentum was just way too strong, especially since UK markets were about to open then.
However, profit-taking started happening by the time it was clear that the official results would show a “leave” victory. Soon after, UK Prime Minister David Cameron stepped up to the podium to express his disappointment and later on announce his resignation, triggering a brief selloff. This was followed by Bank of England Governor Mark Carney’s testimony wherein he reiterated that the central bank won’t hesitate to implement stimulus efforts if necessary.
Currency Intervention
hroughout the market selloff that ensued on June 24, safe-haven currencies such as the US dollar, Japanese yen, and Swiss franc gained ground. However, the yen and franc quickly gave up their gains as monetary authorities started jawboning. Soon after, the Swiss National Bank admitted to interfering in the forex market to prevent further rallies for their currency.
So far, Japanese officials haven’t confirmed any actual intervention moves but the price action of the yen immediately following the announcement of the official results suggests that the Bank of Japan may have stepped in as well.
This left the US dollar as the main safe-haven of choice as risk aversion settled in, even as the Brexit is likely to convince the Federal Reserve against hiking interest rates anytime soon.
Post-Brexit Fallout
The financial fallout following the Brexit has wiped out trillions of dollars from stock markets since Friday. The FTSE 100 index has dropped from 6339.40 to a low of 5787.50 in a single day before pulling up to 6133.50 to end the week. The stock index has then resumed its slide on Monday as uncertainty lingered in the markets.
UK officials from both anti-Brexit and pro-Brexit camps have tried to reassure the markets, reiterating that they plan on getting the best deal possible to preserve trade agreements and jobs by the time the UK exits. EU officials, on the other hand, appear keen on getting on with the negotiation process to let the UK exit as quickly as possible.
The political uncertainty brought forth by PM Cameron’s resignation appears to have made matters much worse. Although he intends to stay until his successor is appointed by September or October, some say that his decision to step down would leave parliament more divided than ever.
The lack of political continuity has been one of the reasons why credit rating agencies Fitch and S&P downgraded UK sovereign debt this week. The UK government was stripped of its pristine AAA rating while growth estimates were also downgraded by both agencies.
EU Nations to Exit Next?
To top it off, analysts are now speculating that the Brexit would set a precedent for other EU nations that are also thinking of leaving the union. After all, the UK isn’t the only nation that is unhappy about the policies on immigration being imposed by the European Commission heads in Brussels. Nations such as France, Italy, Sweden, and the Netherlands are rumored to be considering holding their own referendums.
Also, the Scottish independence issue was revived over the weekend, as the nation had a resounding “stay” vote in the EU. Scotland’s first minister Nicola Sturgeon called for a second referendum in Scotland and that she is calling on the Members of the Scottish Parliament to block the passage of legislation necessary for the UK to leave the EU.
While these internal issues are at play, UK government officials continue to scramble to figure out what their next steps should be. The next Prime Minister has to invoke Article 50 of the Treaty on European Union before the Brexit is made official and the negotiation process begins. At this point, the UK has to be able to negotiate an agreeable trade deal that would also be in the EU’s best interests.
Elsewhere, central bank heads are also trying to stay on top of things, with European Central Bank head Mario Draghi, Federal Reserve Chairperson Janet Yellen, and Bank of England Governor Mark Carney said to have canceled their attendance to this week’s EU Economic Summit since they haven’t fully prepared their statements in reaction to the Brexit vote.
Interestingly enough, financial markets appear to have consolidated at the start of the trading week, possibly as traders await the next major announcement or an actual plan of action from the UK government and EU officials. For some, the hope of another UK referendum might keep the pound and the FTSE 100 supported for the time being but the impact of the debt rating cuts, capital outflows, and reported hiring freezes in some UK companies might soon take its toll on the economy and force the central bank to act.
Source: TradingView (www.tradingview.com)
