Justin Pugsley - Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Justin Pugsley
Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
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A big week for GBP and western civilisation

By Friday we should know whether this is the beginning of the end of “western political civilisation” as we know it to quote the apocalyptic prediction of European Council President Donald Tusk if the UK votes to leave the EU. For GBP whatever the outcome -- the volatility could be spectacular.

Indeed, it’s such hysterical comments, and the lack of trustworthy facts from both sides of the debate, which are confusing voters, making the referendum result even more uncertain.

A big week for GBP and western civilisation

In the wake of the tragic murder of MP Jo Cox, both sides of referendum campaign called a temporary truce, which saw GBP rise. But with the vote due this Thursday (June 23), insults will once again be traded and if the polls continue to lean in favour of leaving – then GBP will be on the ropes again. Over the weekend the remain campaign appeared to be edging ahead.

However, immigration seems to have emerged as the hot button for voters, trumping the economy even, so if the ‘out’ campaign can play that up – an exit still remains a possibility.

But the reliability of these polls is questionable due to relatively small sample numbers and types of people contacted. Also few British people have much affection for the EU and may well say one thing to a pollster, but once staring at the ballot paper many will probably tick the ‘remain’ box.

It’s therefore likely that most voters will vote to stay, probably by a small margin and this would logically see GBP rally. But if the polls show the remain camp gaining ground this week, much of the rally will be concluded before the result. A remain vote would also be supportive for EUR and would likely see gold, CHF and JPY lose ground, at least temporarily.

However, even a vote to remain will likely see renewed political infighting in the ruling Conservative Party. Many of its leading figures -- such as Chancellor George Osborne with his extraordinary threats to punish voters with tax rises and welfare cuts if they vote to leave – have done themselves considerable reputational damage. A government indulging in an orgy of self-destruction rather than running the country will undermine faith in the currency.

A vote to leave will initially cause turmoil in global financial markets and central banks have indicated that they’re on standby to intervene if necessary. GBP, EUR and emerging market currencies are likely to plunge whilst USD, JPY, CHF and gold will rally hard.

What will follow is a change in UK political leadership and years of protracted negotiations with the EU and lots of uncertainly. However, there’s a faint possibility the two sides could renegotiate a much more favourable deal for the UK to stay followed by a second referendum. The only reason for this would be due to fears that a UK exit could spell the start of the end of the European project.

Also, an ‘out’ vote will signal a profound change in the political status-quo, which has been fragmenting since the financial crisis. It would make it even more believable for Donald Trump to become US President reflecting growing public dissatisfaction with ruling ‘elites’. For currency markets this will spell more regular periods of extreme volatility and extraordinary changes in the global order – though it’s unlikely to lead to the demise of Western political civilisation.

Also, worth noting that US Federal Reserve Chairwoman, Janet Yellen, is due to give testimony on Tuesday and Wednesday (June 21-22). She may give more clues on the Fed’s thinking on monetary policy.

 

TECHNICAL ANALYSIS: Trading the referendum with GBP/JPY

One of the best ways of playing the referendum on the majors is to look at GBP versus JPY – a traditional safe haven currency in times of extreme market stress. Both currencies have the potential to go in wildly different directions this week.

GBP/JPY has fallen fairly consistently for a year now, since peaking at around 195.80 and from a technical perspective there’s not much to suggest that the long-term trend is going to change. Indeed, go back to 2011-2012, the two traded in a range of 118-135 and they could well revisit those levels again given that Japan’s efforts to sap JPY’s strength have not been very successful and that the UK might be in the throes of slowing economic growth.

Support for GBP/JPY in the shorter-term can be seen at 148.25, 147.60, 145.40 and 145.00 and if a Brexit vote occurs or looks set to happen – then levels of 135-140 and lower could be tested.

However, towards the end of last week, the pair pulled back from lows of 145.40 and face resistance around 150.60-90, 152.18 and 154.40. A remain vote could even see 163.90 retested. In the meantime, the RSI is very close to being oversold and GBP/JPY is pushing down hard on their lower Bollinger band with the Stochs having issued a buy signal. Under normal circumstance this would signal that a strong bounce or consolidation is in order – and it still might be.

However, such is the importance the markets attach to the results of the UK’s EU referendum, that an out vote will certainly stress these indicators much further. But at the same time, they do indicate that quite a big bounce is possible if the remain camp win the day.

 

By Justin Pugsley, Markets Analyst, MahiFX

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