Brexit Fears Leave The Fed In The Shadows

The Federal Reserve and the Bank of Japan meetings were expected to be the main market events this week, however, after Monday’s price action the UK referendum polls, real or imagined, are more likely to steal the limelight.

In a bizarre day on the FX market on Monday, false EU referendum polls and stray tweets had highly anxious traders on edge. The pound gyrated wildly, one moment it was surging on the back of rumours that the EU remain camp had taken back the lead, before plunging once more when the latest official poll put the leave camp slightly ahead with only nine days to go before the vote.

Polling methodology guide trading decisions

The latest poll by ICM for the Guardian saw support for the leave camp jump to 50%, with remain at 45%, those who are undecided currently stand at 5%. Markets were spooked after it was revealed that the latest phone poll also points to a win for the leave camp, when previously phone polls had shown more support for the remain camp. At the start of another trading week, investors seem more concerned with the methodology of such polls rather than what Janet Yellen will tell the markets when the Fed meets later this week, or what UK CPI will look like for last month.

Brexit fears start to bite in the US

US traders are also starting to worry about a win for the leave camp on the 23rd June. The US equity options market has experienced some unusual hedging activity as investors who own US shares rush to buy protection in case a vote for Brexit next week causes a negative shock to global stock markets. Right now, there is more hedging activity for options on the S&P 500 expiring just after the 23rd June vote than there are is for the US election in November. It seems unlikely that Janet Yellen can offer any soothing words to encourage a recovery in risk sentiment when the UK referendum hangs so ominously over global markets.

Even the Bank of Japan, who holds its meeting this week, may choose to hold fire rather than pump more stimuli into its faltering economy. The yen has been one of the chief beneficiaries of Brexit uncertainty in recent weeks as investors flock to safe havens. Thus, it seems futile for the BOJ to stand in the way of the yen in the current environment; instead it may choose to delay increasing the size of its stimulus programme until later in the summer.

Can UK data save the Remain campaign?

A little glimmer of hope for the Remain camp could come in the form of weak UK economic data this week. CPI later this morning, labour market and wage data on Wednesday, and retail sales on Thursday, may shape the debate as we head into the last week of campaigning. If we see evidence of a further slowdown in the UK economy, could public opinion shift away from the Leave camp, as voters question whether the UK’s economy could handle the shock of Brexit?

We shall have to see if weakness in the UK’s economic data can materially change the direction of polls ahead of the referendum. If it can then we could see the pound bounce on the back of weak data…

Overall, the pound remains an easy target this week unless we see a shift in sentiment towards remaining in the EU over the coming days. We expect to see further erosion in global risk sentiment, which may only be mildly assuaged by a dovish tone from the Fed’s Yellen on Wednesday.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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