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EUR/USD at Support, GBP/USD at Resistance One Week Before Brexit Results

EUR/USD at Support, GBP/USD at Resistance One Week Before Brexit Results

2016-06-17 13:33:00
James Stanley, Strategist
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Talking Points:

- Next Thursday brings the widely-awaited Brexit referendum, with the final vote expected for Friday morning in the UK (7-9 AM in UK, 2-4 AM Eastern). This is likely to be an extremely volatile event, and traders would likely want to account for this next week in any macro-related exposure. While many new traders look at the potential for extreme volatility as opportunity, many professionals look at it as pure risk or danger. Be very careful, and remember – you do not have to trade Brexit. ‘Cash is a position, too.’

- We’re currently seeing EUR/USD at support with a bullish SSI-read, while GBP/USD is at resistance with a bearish SSI-read. Given the fact that both pairs will likely be sensitive to the upcoming referendum, this observation could be usable for traders. To learn more about SSI, please click here. And if you’d like to watch our SSI Strategy Walkthrough Webinar that we hosted yesterday, please click here.

- If you’re looking for trading ideas, check out our Trading Guides. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

This week brought quite a bit of news to global markets and with the widely-awaited Brexit referendum set for next Thursday, we aren’t out of the woods yet. Given some of the recent global market reactions to sways in poll numbers around the referendum, traders would likely want to be aware of what’s going on when in any macro-sensitive markets going into the vote. This week we heard both the Fed and BOJ highlight their concerns around the referendum that they had to contend with while shaping policy at their most recent meetings.

The difficult part about Brexit is that it’s going to be impossible to foretell what may happen until we actually get the vote numbers, and this is likely why we’ve seen so much volatility emanating from polls despite the small sample sizes. Frankly, nobody knows the way that this referendum is going to pan out, and even if we did – we have no idea how the Sterling is going to move around the vote. We’re not the only ones seeing this, as many banks, hedge funds and institutional players are likely going to be tightening up risk (if they haven’t already) in assets that might be sensitive to a vote to leave. This means lower liquidity, which also means the potential for volatility is extremely elevated.

Voting numbers for the Brexit referendum are expected to come in early on Friday morning, from between 7-9 AM London time (2-4 AM ET). As these numbers are released, we’re likely going to see traders immediately beginning to price-in whichever theme wins out. So, if we see a vote to ‘stay’ we’ll likely see bullish price action across the GBP-space while risk assets like stocks run higher. If we see a vote to ‘leave’ or ‘Brexit,’ we’re likely going to be looking at a weaker British Pound along with a heavy dose of risk aversion across global markets, particularly those in Europe.

But because of this expected lower-liquidity environment, those moves can be especially sharp as the impetus of buying or selling pressure can run through the lessened available liquidity around the referendum. To put it simply, support or resistance may not hold as well as usual because of the lower amount of liquidity or sitting orders available to be triggered around support and resistance levels.

On the charts below, we look at two markets that may show the highest sensitivity around the Brexit referendum.

GBP/USD

This one is rather obvious, and it appears that we’ve already seen an element of rampant volatility emanating into the pair around recent sways in poll numbers. This will likely be the proverbial eye of the storm around the Brexit referendum as traders move quickly to price-in whatever direction the vote lands.

In a normal environment, GBP/USD would be illustrating a bearish setup as the past two weeks have seen the pair work on lower-lows and lower-highs as the probability of a Brexit has been seen as increasing. But this is anything but a normal environment in Sterling-pairs right now.

On the chart below, we’re looking at the Daily setup on GBP/USD. Notice the recent influx of bearish price action as Brexit fears have become more priced-in to the Pound as recent poll numbers have swayed to the ‘leave’ camp. But this brought price action down to a previously strong zone of support in the 1.4000-1.4055 area.

EUR/USD at Support, GBP/USD at Resistance One Week Before Brexit Results

Created with Marketscope/Trading Station II; prepared by James Stanley

EUR/USD

Another currency directly impacted by the upcoming Brexit referendum is the Euro. As we’ve seen Brexit-risk being priced-in more aggressively in the Sterling, beginning around June 8th, we’ve seen a similar such movement in the EUR/USD, albeit in a more-abbreviated manner. On the chart below, we look at EUR/USD being supported from a couple of different studies. The level of 1.1212 is the 61.8% retracement of the ‘lifetime move’ in EUR/USD, and a projected trend-line offered an inflection yesterday before prices bounced higher.

EUR/USD at Support, GBP/USD at Resistance One Week Before Brexit Results

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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