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UK Votes for Brexit - Markets Highly Volatile - Caution Advised

UK Votes for Brexit - Markets Highly Volatile - Caution Advised

2016-06-24 04:45:00
Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Recent results: SkyNews reports 51.8% to 48.2%.

- BBC, SkyNews, and ITV call UK-EU referendum for 'Leave.'

- FX volatility is set to remain high - it's the right time to review risk management principles to protect your capital.

The official tallies are still coming in, but it looks like ‘Leave’ will take it. A Brexit, which was widely dismissed as a non-event – FX options were pricing in a 20% chance of a Brexit, while betting markets (as aggregated by OddsChecker) were pricing only a 25% before polls closed today – is now at the doorstep of being a gamechanger.

It’s still early, but it’s important to understand and appreciate the magnitude of the event. To no uncertain degree, this result now throws into question the viability of the European Union. Already, in the wake of the initial results, we’ve heard from political parties in Scotland (to stay in the EU and not follow the rest of the UK out) and in Holland (to hold a referendum to leave the EU). What was once seen as an outside, minimized tail-risk, is now a very real possibility: the European Union ceases to persist in its current form.

Markets have reacted with shock and awe around this historical evening, with GBP/USD putting its single largest move since 1985 and establishing its largest daily trading range in history – and the day is not even half over yet. European cash equity markets haven’t opened yet, and US equities are just under 9 hours from opening; markets may be panicking, but the panic is just setting in.

While this may be a tempting environment to trade in due to the volatility, it’s incredibly important to understand and appreciate the magnitude and potential fallout of this event. Individual position risk should be kept low – minimal leverage used – and risk management needs to be highly active, if you’re going to trade whatsoever.

An event on this scale means standard technical analysis matters less – liquidity is thin and levels aren’t being respected. This is when spreads widen and slippage can occur. Don’t be a hero, don’t try to catch a falling knife, etc – the market reaction is just beginning.

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

FX volatility is set to remain high with the UK voting to leave the EU - it's the right time to review risk management principles to protect your capital.

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