Britain has voted to leave and market focus will be now be on the UK economy and European politics. Friday's low in GBPUSD came off a key chart point which might also be worth watching.
The two key issues for markets are now
- Will Brexit be the beginning of the end for the EU and Eurozone?
- What affect will it have on the UK economy
Here’s a summary of what appear to be some of the major issues for markets
As far as Brexit and Europe is concerned, it’s possible to have either a half glass full or a half glass empty approach
The optimists would see Brexit acting as a wakeup call for leaders. This might prompt much needed reform. Markets are likely to be pretty cynical about this possibility given the past lack of reform action.
The pessimistic possibility sees Brexit emboldening Euro sceptics. This could lead to a process of escalating and disruptive efforts for various nations to begin the political process of following Britain with their own exit.
Market focus: Markets will now be more than ever attuned to political risk events surrounding Europe. Spain’s election over the weekend looks like a bullet dodged with the pro Europe, Rajoy government increasing the number of seats it holds
Here’s a list of potential positives and negatives for the UK economy following the Brexit decision.
- Weaker Pound helps exporters
- Savings on EU contributions
- Less regulation
- Skills based migration policy
- A long period of uncertainty leading up to the exit. This could see reduced confidence leading to lower consumer spending and business investment.
- Possibility that Scotland may agitate to leave UK again leading to further destabilisation
- Possible tariffs on exports to EU and loss of the single market
- Possible damage to the City of London if banks servicing the EU relocate
- Possible drop in foreign direct investment
- Lower population growth with fall in immigration.
Market focus: The potential for uncertainty and loss of confidence are the immediate issues for markets. The selloff in the Pound says markets are assuming this will happen.
One fascinating aspect of Friday’s market turmoil was the number of major turning points made off key chart points
In the case of the Pound, Friday’s low came neatly off a harmonic AB = CD point. As often happens this stopped the market just below the more obvious support zone of the 2001 and 2009 lows.
The Pound is a falling knife at the moment, and it would be premature to call this a major low on a big picture monthly chart like this yet. However, if the Pound does start to consolidate around this level in coming days and throw up some basing patterns on shorter term charts it might it might pay to be alert to the possibility of a major low here.