Talking Points:
- With the Sterling already sliding on unfavorable Brexit bearings, overnight news leveraged a shock tumble
- Dollar stands to be the main benefactor in the debate over Pound or Euro suffering the most on systemic Brexit risk
- Top event risk ahead is the September US employment data with an emphasis on the NFP's shock
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
Typically, the Tokyo trading session before the monthly US payrolls report is an exceptionally quiet period. Few market participants want to take dramatic exposure for fear of being on the wrong side of a surprise employment report. However, things were much different in the earlier hours of Friday's session this time around. A dramatic tumble from the British Pound drew traders attention and fanned a mild sense of panic. While the Sterling drop was universal, GBP/USD led the way symbolically with a five percent plunge in the span of a few minutes that drew strong corollaries to the Brexit plunge in late June.
To facilitate this market collapse, there were a number of factors converging. The Pound has been sliding all week following UK Prime Minister Theresa May's remarks that the country was prepared to pursue a 'hard Brexit' by losing access to the single market in order to ensure immigration control. With further surveys suggesting fading confidence in the country's economy and financial system, the decline continued into the thinnest trading conditions of the week (Asia session pre-NFPs). Such shallow market conditions and the overbearing bearish bias made fertile ground for a panicked reaction to news that French President Francois Hollande was calling for clear consequences for the UK in its Brexit ambitions to avoid a collapse of confidence in the European Union.
The lines have been drawn for the Brexit - either the Pound suffers outside the single market or the other EU members will be motivated to leave the group and undermine the Union and possibly Euro. The greater pain between the Euro and Pound will ebb and flow as systemic considerations pass time and circumstance. However, through this messy process, the Dollar remains an appealing alternative for yield and stability. The ICE Dollar Index (DXY) certainly benefit the overnight volatility, but follow through in general range conditions is still difficult to muster. The NFPs ahead will cater to both rate speculation and risk trends, but the real drive may be found in the search for absolute reserves and growth. We look at big moves from GBP/USD and USD/JPY to coiled setups such as the S&P 500 ahead of the US employment report in today's Trading Video.
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