As it became clear that the outcome of the UK referendum was going to be an exit from the EU, the UK pound literally got pounded as it dropped from an overnight high of 1.50 to sub 1.33 when the news was confirmed, while the FTSE tanked nearly 10% at the open. Most people were undoubtedly wrong-footed given how confident some betting companies were in pricing in the odds for remain. Naturally, the markets have rebounded sharply off their lows as you would expect. Profit-taking and dip buyers have, for now, provided some relief. Traders who have not yet expressed their views are starting to come back into the markets as key levels are re-tested, so volumes and volatility should remain high for a while yet. Given what has happened, most speculators are likely to step in and fade the rallies rather than buy the dips.
As for the Cable is concerned, the area around 1.40 – which was the prior reaction low – is very important to watch, while the corresponding key levels for the EUR/GBP and GBP/JPY are at 0.80 and 145.40, respectively. For the FTSE, which is benefitting slightly because of a weaker GBP, 6050 should be watched for a reaction, though a decisive break above this level could expose the 200-day moving average, around 6150, for a re-test. Whether or not this morning’s earlier lows in sterling or the FTSE will be tested again – or breached – in due course is up for debate. But I would be very surprised if this wasn’t going to be the case.
When it comes down to trading the markets in the aftermath of the Brexit outcome, some speculators will probably want to take advantage of the current high volatility while the more conservative traders will probably wait until the dust settles before stepping back in. Some will be merely looking for reaction of price around the key technical levels, such as those mentioned, while others will be going for swing trades and no doubt some would be trying to pick the bottoms for short-term bounces.
I think there will be opportunities on all fronts, which means volatility should remain high for a good few trading days at the very least as these market participants interact. But whatever your style of trading, it is important to know you levels, know where your stops will be in advance and don’t risk on any one trade more than you would normally.