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All Quiet on the Western Front as GBP/USD Guides Equities Higher

All Quiet on the Western Front as GBP/USD Guides Equities Higher

2016-06-29 12:00:00
Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- GBP/USD perks up through $1.3400, pulling DAX and SPX500 up.

- New regime in precious metals as shift in sentiment does little to reduce recent luster.

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

More rabble rousing in the British Parliament on Tuesday (outgoing Tory PM David Cameron said to Labour leader-in-crisis Jeremy Corbyn, "for heaven's sake, man, go,' in a call for him to resign) but thus far there are no real implications for markets. Nor has PM Cameron in his question session revealed much new information:; the government, under Cameron's guidance, will not change its approach towards the fiscal surplus spending rule (keeping the country under the cloud of austerity); and the Cameron-led government will continue to take a harsh stance on the economic repercussions of the Brexit vote.

The sobering reality is that there won't be any movement on the Brexit front until the Conservative party conference in September, at which point a new Tory leader will be elected. Given the magnitude of power the new PM will have - the ability to trigger Article 50 (or not) - there is likely a vote of confidence and perhaps a general election in the pipeline for late-Q3'16 or early-Q4'16.

Don't expect European Union officials - particularly heads of state - to say much on the issues until then. German Chancellor Merkel, French President Hollande, and Italian Prime Minister Renzi all made clear that informal discussions on Brexit would not occur; that it was only in Britain's power to trigger Article 50. If there's a strategy from EU brass, it mind as well be 'keep quiet on the Western front.' All's quiet indeed (though expect Italian PM Renzi to try and use Brexit as cover for help for the flailing Italian banking sector).

If there is any hope that a Brexit never actually comes to fruition, this is a savvy political move. Outside interference - loss of national sovereignty - was a significant platform point for the 'Leave' campaign. If the UK's internal political process plays out in such a manner that a general election mandate supercedes the referendum, then maybe all this concern is for naught. Any talk by European officials that alludes to disrespecting the democratic will of the British people will surely strengthen the Brexit case, which in and of itself is a catalyst for more volatility.

Read more: GBP/USD Driving Equities and Volatility, Likely to Persist

How does Brexit impact the Euro? Read our Weekly Trading Forecast, "Realization of Brexit is a Potential Nightmare for the Euro"

--- 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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