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S&P 500 Leads the Risk Rebound, Why Do Pound and Yen Crosses Lag?

S&P 500 Leads the Risk Rebound, Why Do Pound and Yen Crosses Lag?

2016-06-30 02:35:00
John Kicklighter, Chief Strategist

Talking Points:

  • The S&P 500 has seen a remarkable reversal of its Brexit tumble, as other markets show far less enthusiasm
  • Volatility will only magnify the restraint on speculative appetite and key levels are coming into view
  • We review EUR/USD, GBP/USD, USD/JPY, the S&P 500 and global equities among other benchmarks

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

The risk rebound over the past 48 hours has been remarkable...if you were using US equities as your benchmark for sentiment. However, the epicenter of that initial wave of fear saw little of the recovery enjoyed by shares. The British Pound's retracement of Friday's unprecedented tumble has proven remarkably restrained. That is especially remarkable for GBP/USD where the two currencies are considered equivalent havens or GBP/JPY which carries the amplitude of the Yen crosses' exposure to risk trends.

Brexit represents a systemic shift for the British Pound, so its restraint is not particularly surprising. However, recent volatility has also exposed the lack of depth in investors' appetite for unburnished risk. Averting the spread of an imminent crisis, in other words, is not the opportunity to double down on hazardous trades. So, the speculative swell may prove a limited engagement. Further, its uneven market influence makes it difficult to access outside of particular equity outlets and volatility products - which have come upon meaningful boundaries. Yen crosses, Pound pairs, commodity currencies and other FX outlets have notably lagged the sentiment shift. This may provide opportunity should the winds change again in favor of deleveraging; but it also prove an indiscriminate disconnect.

As we await underlying themes to take back the reins on market movement, trading conditions will remain key to filtering and executing trades. EUR/USD for example which has distinct Brexit spillover influence (perhaps even more than the Pound individually) retains the volatility commensurate with uncertainty. That volatility has undermined the influence of technical boundaries like the confluence of the 200-day moving average and mid-point of the past year's range falling around 1.1100. Yen crosses should be evaluated by their sensitive to risk but also their standing in recent historical ranges. And, there are unusual pairs like USD/CAD which haven't experienced the same overwhelming response to Brexit which may represent a different opportunity. We look at the opportunities arising out of the still-volatile market conditions in today's Trading Video.

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