The atmosphere in the lead up to the referendum is reaching fever pitch. Thursday’s Brexit news started with the unusually stark letter from Bank of England governor Mark Carney to an MP, defending his right to discuss the topic during Purdah. It moved to the absurd ‘boat battle of the Thames’ between Nigel Farage, as part of a flotilla of fishing boats and Bob Geldof on a boat of Remain campaigners. It then ended with the horrific murder of MP Jo Cox, where the killer is reported to have said “Britain First” before shooting.
The tragedy, especially because of the apparent Brexit motivation has meant all campaigns will be suspended on Friday as a mark of respect. The suspension of campaigning resulted in market chatter that the vote could even be rescheduled following Jo Cox’s death. Even if the vote goes ahead as planned, which presumably it will, yesterday’s events could damage pro-Brexit campaign.
The result has been massive Brexit volatility in markets. This was most apparent in the price of gold, which reached a two-year high of over $1315 per oz in a flight to safe assets, before crashing to $1280 per oz. Gold rallied over 2% from the open to then fall over 2% from the high.
The British pound also recouped the day’s heavy losses to rebound above 1.42 from a low of just above 1.40 to the US dollar. The latest polls from Survation and Ipsos Mori put the Leave campaign well-ahead, meaning Sterling will still face an uphill battle to further gains.
Economically at least, there is little supporting evidence so far that fears of the referendum has had any impact on the UK. The retail sales data for May shows the UK consumer has kept their hands firmly reaching into their pocket throughout the lead-up to the vote.
US stocks tracked the 180 degree reversal to upside in the British pound, leaving the Dow Jones up by nearly triple digits, after being down over 100 points. As such, European markets look set to play catch-up with a strongly higher open on Friday.
With investors thinking ‘safety first’ before the EU referendum, central bank inaction this week has been seen in a negative light. The US dollar has been rallying as a haven asset, despite a cautious Federal Reserve that seems unlikely to raise rates before September. If markets return to risk-on, the Fed’s caution could come back into focus and the dollar could lose its bid. The Fed, BOJ and BOE staying pat is being seen through the lens of weak global growth and central banks with empty toolboxes. The sharp reversal in risk-assets in the last 24 hours may be a sign that negative sentiment has reached some unsustainable extremes.
EURUSD – The euro reversed off 1.1140, the March 24 low and just above the 200 DMA with a hammer-like pattern, a possible indication the pair will head back higher into its trading range capped by 1.14.
GBPUSD – Sterling rebounded from near 1.40 and from within pips of the April 6 low to take it back above 1.42 in a sign that it may remain within its 1.40-1.47 range for the time being.
EURGBP – The euro-Sterling pair has former four daily candles with long upper wicks suggesting selling pressure from 0.7950 to 0.80, the shoulder of the failed head and shoulder pattern. While the shoulder may break, it appears a bigger pullback may be in order first.
USDJPY – Dollar yen has recovered off its lows below 104 but the trend remains firmly down with former support at 1.0550, now major resistance.
Equity market calls
FTSE100: to open 49 points higher at 5,999
DAX: to open 113 points higher at 9,663
CAC40: to open 47 points higher at 4,200
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