What’s Happening?

The UK is scheduled to hold its Brexit referendum on Thursday June 23rd. Polling trends and other campaign developments have sparked significant short term trading swings in both directions in recent months. It’s looking like a close race right to the wire. With some parties forecasting the potential for a substantial move in Cable depending on which side wins, we could see significant trading opportunities emerge in both directions over the course of the week.

 

Technicals:

 

GBP sold off at the end of 2015 and the start of this year but since mid-January with the exception of a brief decline at the end of February when the campaign started, Cable has been trading in a wide range mainly between $1.4000 and $1.4700.

 

This has not been a passive range, rather is has been an active battleground between bulls and bears where there have been significant swings in both directions with intraday ranges of 100-200 basis points quite common.

 

Last week, Cable soared following a successful test of $1.4000 channel support back up toward $1.4300. Heading into the final few days of the campaign, downside support levels from here include $1.4205, $1.4100, the $1.4000 round number and April low, plus $1.3900 and the February low near $1.3835. Upside resistance tests may appear near $1.430 he 50-day average, the $1.4500 round number, $1.4600 $1.4655, the 200-day average near $1.3700 or the May high near $1.4775.  

 

Fundamentals:

 

Markets, especially liquid ones like major currencies, are usually pretty good at picking up on trends and forecasting the future but can still be blindsided by surprise events. Because it’s such a close contest, we could see more big intraday swings this week and whatever the result is, we may see some traders stuck scrambling to get back on side.

 

That being said, the boundaries of the current trading range appear to be good proxies for sentiment. Last week when momentum was moving heavily in the Leave direction and traders were piling on Brexit anticipation, Cable tested the channel bottom at $1.4000 but did not break it. The huge snap back rally when campaigns were suspended showed that Brexit had been getting close to fully priced in near $1.4000.

 

A big wild card following the vote is what central banks may do if the results spark a major move in GBP against other currencies. The ECB, Swiss National Bank and Bank of Japan have all indicated that they stand ready to intervene should the results destabilize the markets and impact their currencies. Bank of England Governor Mark Carney, on the other hand, has been too busy contributing to the Chorus of Brexit Doom coming out of the global establishment to bother indicating whether he is ready to manage different scenarios or not.

 

The reaction to the results may depend on what markets price in by the time the polls close. Trading at the top of the range would price in a Remain win, trading at the low end of the range would price in a Leave win and trading in the middle of the range around $1.4350 would suggest traders seeing the result as a coin toss.

 

 

 

 

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