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Video: Pound, Dollar, Risk Intensify Focus on Approaching Brexit Vote

Video: Pound, Dollar, Risk Intensify Focus on Approaching Brexit Vote

2016-06-22 02:14:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Brexit-charged GBP/USD volatility duped many with a false break of the 200-day moving average
  • Unease is growing in risk trends with trend drying up for the likes of SPX while USD's sensitivity reflects focus
  • Pound, Euro, Dollar and Yen all batten down for the Brexit - few outlets left for low-risk trade opportunities

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page. Having trouble trading in the FX markets? This may be why.

There is no escaping the volatility preceding Thursday's pivotal vote. For those that thought they could still focus only on the technicals and let the event risk play out in the background, GBP/USD showed the dangers with selective analysis that veers away from what is guiding the broader market. The momentum that started this week with polls shifting back in favor - albeit marginally - of the 'Remain' camp carried through a break above the 200-day moving average. A breach of a critical resistance would under normal conditions prompt a trend shift and motivate follow through. Yet, with such a cataclysmic event ahead, committing to a prevailing trend is extremely risky.

Normally, the focus on critical event risk just over the horizon would support tactical trading. That is a trading approach where the emphasis is on short-term scenarios, technicals and fundamentals only for volatility. However, there is a fold that to this particular scenario that makes even that risk-oriented approach dangerous: liquidity. As fear drains the markets, volatility increases to undermine the influence of technical levels and bolster the risk of gaps. There is little edge to find in such circumstances and risk management is virtually impossible.

As we head into the 'no man's land' preceding the Brexit, unwinding risky exposure is increasingly important. Fear in Pound crosses remains astronomical as can be seen in risk reversals. Fear and deleveraging in other risk-oriented assets is generating a mild boost to a false sense of security with measures like the VIX easing back. However, the market's focus is clear from S&P 500 to the US Dollar to volume. It is time to think first of risk and plot opportunities after the tornado hits. We monitor the growing risks in today's Trading Video.

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