Fears Of ‘Brexit’ Decrease On The Market

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Fears of Brexit decrease on the market

The discussion over the UK referendum continues to dominate conversation despite reduced “Brexit” fears on the financial markets. Following US President Obama’s clear support for the UK to remain part of the EU, the probability of an exit has decreased meaningfully as reflected in certain polls. In general, online markets and bookmakers have seen the likelihood of an exit fall from 34% to 28%, while traditional polls, reporting a very close race, have calculated only a marginal fall as a result of these comments. It this clear that discrepancies in polls and questionable credibility (especially as a result of the Scottish referendum polling fiasco) are generating uncertainty. From a market standpoint, worries over an exit seem to have been reduced.

The sterling has paused around a 3-month high at 1.4650, against USD and EUR bullish momentum, GBP 1 month implied volatility has fallen significantly, while GBP/USD 25d risk reversals have recovered from lows. Yet, GBP IMM speculative positions remain short. With the UK conducting mayoral and regional elections this week the debate over Brexit will undoubtedly dominate. UK economic data scheduled this week includes manufacturing and services PMI and CBI Industrial trends, which are all expected to highlight an economy that is further decelerating. We anticipate the “remain” vote will seize on the soft data heading towards the EU referendum as evidence of the negative consequence of a break-up. We suspect that the recent GBP recovery will be short-lived and will erode the closer we get to June 23rd. GBP/USD has been unable to break the 1.4664 resistance (04/02/2016 high) suggesting a pullback to 1.4475 (27/02/2016) support

The SNB intervenes slightly to weaken the CHF

Data released this morning, shows that Swiss Total Sight Deposits continue to grow higher, rising from CHF 490.9 billion for the week ending 22nd April to CHF 491.2 billion last week. We believe that there are growing evidence that the SNB is intervening in an attempt to further weaken the domestic currency. Since the end of January 2015, total deposits have increased drastically – by more than CHF 50 billion.

The SNB is closely scrutinising any comment or action from the ECB that could result in further appreciation of the CHF. For the moment, the ECB’s monetary policy has not proven its ability to deliver the necessary results. Two weeks ago, Draghi announced that European “inflation should go more negative before bouncing back”. The Helvetic currency has been appreciating since also due to its safe haven status and global uncertainties, namely lingering low commodity prices and high geopolitical risks such as Brexit. Fears of a dismantled European Union is pushing the EUR/CHF lower and driving the SNB to intervene, even though very slightly, on the FX markets.

Over the past months, the EUR/CHF has grown slightly and is currently trading slightly below 1.1000. It seems that there is a strong resistance area at this level and the pair keeps on bouncing back. We remain bearish on the pair but are also vigilant of any surprise action from the SNB.

EUR/CHF Chart

Today’s Key Issues

The Risk Today

EUR/USD EUR/USD keeps on increasing. Hourly resistance at 1.1465 (12/04/2016 high) has been broken. Hourly support is located at 1.1217 (25/041/2016 low) and stronger support can be found at 1.1144 (24/03/2016 low). Expected to show further increase. In the longer term, the technical structure favours a bearish bias as long as resistance at 1.1746 ( holds. Key resistance is located at 1.1640 (11/11/2005 low). The current technical appreciation implies a gradual increase.

GBP/USD GBP/USD has broken resistance at 1.4668 (04/02/2016 high). Hourly support is given at 1.4475 (27/04/2016 high). Expected to show further consolidation before entering into another upside move.The long-term technical pattern is negative and favours a further decline towards 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 USD/JPY keeps on declining. Hourly support can be found at 106.15 (intraday low). Hourly resistance can be found at 107.42 (29/04/2016 high), stronger resistance can be found at 111.88 (28/04/2016 high). Expected to show continued weakness. 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 USD/CHF is clearly oriented downwards on the medium-term and has broken hourly support at 0.9585 (19/04/2016 low). Stronger support can be found at 0.9499 (12/04/2016 low). Expected to show further further weakening. 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

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