GBP/JPY in focus ahead of Brexit vote
James Chen, CMT June 22, 2016 1:20 PM
In the immediate run-up to Thursday’s EU referendum in the UK, as market participants have increasingly come to doubt the probability of a pro-Brexit outcome, a general "risk-on" environment has enveloped global markets. With respect to currencies, the two that potentially stand to gain or lose the most from the outcome of the vote, the British pound and the Japanese yen, have reacted in somewhat predictable ways to this new market environment.
Whereas the volatile pound was heavily pressured and the safe haven yen was strongly boosted only a week ago, when formal polls had been showing robust momentum for the Leave camp over Remain, late last week saw a sharp reversal after the tragic killing of pro-EU British politician Jo Cox. That event partially contributed to increased support for the Remain camp which, in turn, helped to allay the markets’ previously rising concerns over a Brexit outcome. This prompted a sharp relief rally for sterling while simultaneously disrupting the relentless rise of the safe haven yen.
For GBP/JPY, this turn of events was accentuated by a clear hammer candle reversal pattern that established a new three-year low near the key 145.00 support target before turning back to the upside. From a longer-term perspective, GBP/JPY has been entrenched in a clear bearish trend for the past year and even began to accelerate its fall since late 2015.
With the UK’s EU referendum just a day away, GBP/JPY’s ability to sustain the current rebound or sharply reverse it should depend entirely upon the outcome of the Brexit vote. While the Remain camp has certainly had a late surge in momentum, most recent polling as indicated by several polls of polls has shown the two sides of the debate essentially "neck and neck" in an extremely tight race. The result could very well be decided by the sizeable group of undecided voters.
With respect to GBP/JPY, a Remain outcome should likely lead to a further recovery of the embattled currency pair from its long term lows. Such a recovery could be limited, however, due to the current rebound showing that the markets have already priced-in, to a certain extent, a greater likelihood of a Remain outcome. A further surge for GBP/JPY on a pro-EU result, therefore, could well be limited to the upside by key resistance around 164.00.
A Leave outcome, in contrast, would likely prompt a precipitous fall for the currency pair, well below its recent 145.00-area lows. Such a breakdown could likely lead to a rapid plunge below 140.00 and well into the 130.00’s, or lower. It should be kept in mind, however, that any such drop could very well be followed by a strong opposite reaction, especially in the event that Japan acts quickly to intervene in attempts to stem the unwanted strengthening of its currency.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.