Expect Brexit volatility to drive risk-on/risk-off trading


  • The true impact of Brexit will not be known for months and perhaps even years. However the markets continue to react with this huge Brexit volatility in the short term and that is because of the uncertainty driving risk-on/risk-off trading. There is uncertainty over the political ramifications in the UK (new PM, new opposition leader, Scottish Independence?), uncertainty over monetary policy (will the BoE cut rates, or introduce more QE?), uncertainty over the impact on Europe (will the EU begin to terminally breakup?) impact on the global economy (growth forecasts are being slashed). This uncertainty is driving volatility in markets as traders have so many questions still unanswered.

financial markets uncertainty

  • The uncertainty is driving huge swings in risk appetite, initially it was lower and now there is a rebound. But can/will a rebound last? This kind of retracement is often seen but will usually turn out to be merely an unwinding move before the next bout of selling pressure. This is my preferred scenario, as I do not believe the rebound will last. The swings in risk appetite initially drove investors into safe havens (Treasuries, yen, dollar, Swiss franc and gold) but now these moves are seeing a retracement as riskier plays are bouncing (sterling, euro, oil, equities).
  • However the uncertainty over Brexit will not be resolved in a few days and this will mean that markets are likely to remain under pressure. The safe haven plays will again return to favour and this should mean that the dollar bounces again.
  • Despite the outlook for the next Fed rate hike now being pushed out into next year, the dollar is strengthening on the safe haven bid. The sharp rebound in the dollar index from 93 to over 96 has driven the PBoC to weaken the yuan to the lowest level for over 5 years. This could impact across the emerging markets and be a source of risk aversion in the coming weeks. The dollar strengthening on strong US economic conditions could be considered to be a positive but dollar strength on a flight to safety is not bullish for markets.
  • However market volatility can be expected to continue. Sterling/Dollar options volatility may have dropped back but is still elevated on a historic basis, as are equity markets volatility gauges.
  • Forex markets can be expected to swing between bouts of risk-off and risk on. Right now the market rebound today means better risk but I cannot see it lasting for any extended period without another wild swing the other way. That means periods of yen, dollar and Swissy strength along with relative sterling, euro, Aussie, Kiwi and Loonie weakness. This is the most likely trend in the coming weeks.
  • In equities, the interesting feature is that the FTSE 100 has been outperforming despite the selling pressure. The sterling weakness actually helps the performance of companies that generate revenue abroad (and also those that pay their dividends in dollars). The questions over the impact on the EU but without the huge currency depreciation of the euro has meant that the DAX and CAC are underperforming. The FTSE 100 has even managed to outperform the S&P 500 (just).
  • Commodities are a split play as the safer haven precious metals will be supported by risk aversion and sold as risk improves (gold performance today is a classic reflection of this), whilst oil being a signal of economic growth can be considered to play the opposite.
  • Economic data is relatively light this week, however focus will be on the Fed’s preferred inflation measure, the core Personal Consumption Expenditure, which it will be interesting to see if the recent stalling in inflation can be re-energised. Thereafter the week ends with the Manufacturing PMIs. Will the PMIs be impacted by Brexit? It will be interesting to see if there is a series of data missed due to the Brexit decision. This could further drive a reduction in risk appetite.
  • Watch for: Core PCE, China Manufacturing PMI, ISM Manufacturing



EUR/USD – Looking to sell the rallies

  • Brexit changes the outlook and I now believe that the euro will be on a weakening trend against the dollar, due tio the knock on impact on the Eurozone economic activity and the safer haven status of the dollar.
  • The breach of the 7 month uptrend and the longer term pivot band $1.1050/$1.1100 puts the dollar bulls in control and suggests that rallies will be sold into now. Momentum indicators are corrective too. The outlook would change on a confirmed break back above $1.1200.
  • Watch for: Core PCE, ISM Manufacturing

GBP/USD – Sterling to remain volatile but with further weakness

  • Estimates have suggested that sterling could be set for 15/20% weakness in the event of a Brexit. This puts it the realms of the low $1.20s. The rebound is likely to be counter-trend and rallies will be seen as a chance to sell.
  • How low will sterling go? The rebound off $1.3118 is unlikely to be the bottom signal and with Cable at a 31 year low there is little reason to think that there will not be further weakness in the weeks ahead. The first real resistance is around $1.3500.
  • Watch for: Brexit chatter, Core PCE, ISM Manufacturing

USD/JPY – The yen is still a preferred safe haven  

  • The yen is still the go to currency of a safe haven and this is a drag on dollar/yen. The main caveat to this is jawboning/intervention from the BoJ but for now we must treat rallies as continues selling opportunities..
  • Bearish momentum is a given and there is considerable resistance in the range 103.60/106.80 with which to find the next idea sell-zone.
  • Watch for: Brexit chatter, Core PCE, ISM Manufacturing

Gold – Medium/longer term positive outlook but with near term volatility

  • Safe haven status underpins support whilst if the Fed Funds futures are to be believed the Fed will not now be hiking again until next year and this is further support. The near term volatility could give further chances to buy gold in the support band $1260/$1280.
  • Positive technical indicators suggests that corrections are a chance to buy. A near term corrective move could be seen on a close below $1306 but would be a chance to buy..
  • Watch for: Core PCE, China Manufacturing PMI, ISM Manufacturing

Oil – Medium term bullish recovery is under serious threat

  • The EIA oil inventories drawdown continues to be supportive for oil, whilst the oil strike in Norway is also near term supportive, but the Brexit decision means that oil is at risk of a correction as the oil price is seen as an indicator for global growth (which is threatened by Brexit).
  • The positive trends in oil since the beginning of the year are being threatened and a closing breach of $45.83 on WTI would open the key $43 support. On Brent Crude the key support is $43.75..
  • Watch for: Core PCE, China Manufacturing PMI, ISM Manufacturing, EIA oil inventories to drive volatility

Indices – Equities likely to struggle if the post-Brexit volatility continues   

  • S&P 500 – Wall Street has not been insulated from the Brexit volatility, losing over 5% in just two sessions. Volatility will continues but if the risk aversion and safe haven preference continues then this is negative and rallies will be sold into. A failure to reclaim 2022 on a consistent basis is technically medium term negative.
  • DAX Xetra – The underperformance of the DAX since Brexit is a concern and is likely to continue. A retest of 9214 support could drive further weakness towards 8700 February low.
  • FTSE 100 – Technically the FTSE 100 has not been too badly impacted by Brexit, yet, but the continuation of risk aversion would heap further pressure on the key support now between the low at 5789 and 5900.

Economc Calendar


Tuesday 28th June

  • US – Q1 GDP (final reading)
  • US – Consumer Confidence

Wednesday 29th June

  • Eurozone – German CPI (flash)
  • US – Core Personal Consumption Expenditure
  • Us – Pending Home Sales
  • US – Crude Oil Inventories

Thursday 30th June

  • UK – Current Account
  • UK – Q1 GDP (final reading)
  • Eurozone – CPI (flash)
  • US – Weekly Jobless Claims

Friday 1st July

  • Japan – CPI
  • China – Manufacturing PMIs
  • Eurozone – Manufacturing PMI
  • UK – Manufacturing PMI
  • US – ISM Manufacturing PMI



Monday 4th July

  • UK – Construction PMI
  • US – Public Holiday for Independence Day

Tuesday 5th July

  • Australia – RBA monetary policy
  • China – Caixin services PMI
  • Eurozone – Composite PMI
  • UK – Services PMI
  • US – Factory Orders

Wednesday 6th July

  • US – Trade Balance
  • US – ISM Non-Manufacturing PMI
  • US – FOMC meeting minutes

Thursday 7th July

  • UK – Manufacturing Production
  • US – ADP employment change
  • US – Weekly Jobless Claims
  • US – Crude Oil Inventories

Friday 8th July

  • Canada – Unemployment
  • US – Non-farm Payrolls
  • US – Unemployment & Average Hourly Earnings


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