U.K.-E.U. Referendum Ends with a Leave Win Unleashing a Chaotic Market Reaction
Voters in the United Kingdom decided by a 51.9 to a 48.1 percent to leave the European Union in the final result of the referendum. Financial markets were surprised as days before the vote the Remain camp had made inroads, but as results started to come in that lead never materialized. The historic referendum brought to the surface the deep tensions that have divided the British people and have now come to a democratic decision to reclaim their sovereignty by leaving the European Union.
The result has had an immediate global market impact, with stock markets and currencies witnessing high volatility. Central banks around the world are on alert to deal with the aftermath of the shocking referendum results. Even though it had low probability by their own estimates, all central banks built a Plan B in case Brexit became a reality. The Bank of Japan has already emailed plans for extending swap lines to provide liquidity and keep the JPY from rising as investors covet the currency as a safe haven. Today's Brexit vote sees the yen back to its 2013 levels - Abenomics has been wiped out in less than six months.
The Bank of England (BoE) and the European Central Bank (ECB) are likely to increase their easing efforts which could complicate the plans of the U.S. Federal Reserve to raise rates later this year. Already today the CME FedWatch tool based on the Fed Futures prices points to a possible rate cut as more likely than a rate hike until December. The final week of June will bring few economic indicators with the gross domestic products of the U.S. and the U.K. on the schedule. Political and economic uncertainty will dominate markets as the British pound is trading at 30-year lows following the referendum results.
The GBP/USD lost 8.157 percent in the last 24 hours. The currency pair is trading at 1.3597 after touching a daily high of 1.5019 only to drop to 1.3229 at the height of Brexit panic. The British pound fell as much as 10 percent after results started coming in around the United Kingdom. The world's fifth largest economy held a referendum to decide the fate of its long standing relationship with Europe, and the results will have a lasting effect even if there is a way to stop the breakaway.
The EUR/USD lost 1.687 percent in the last 24 hours. The pair is trading at 1.1161 as the USD has appreciated thanks to safe haven flows. The EUR has not lost much ground despite the implications that its market could be missing such a large economy, but it is logical that the brunt of the depreciation will be on the GBP. The USD is once again riding a wave of monetary policy divergence as it is anticipated the BoE, BoJ and ECB will be forced to deliver conventional and unconventional policy measures to boost growth and avoid falling into a recession.
The USD/JPY has lost 3.35 percent in the last 24 hours. The pair is trading at 102.20 after breaking under 100 earlier in the session due to the aftermath of the referendum results in the U.K. The Bank of Japan (BoJ) has been proactively sending communications on their plans to contain the appreciation of the yen. Governor Haruhiko Kuroda said that the central bank is ready to provide liquidity via swap operations to achieve market stability. The JPY is seen as a safe haven and a way to hedge against the volatility of the GBP and European moves after the Brexit results. The currency is back to 2013 levels which could mean all the work of Kuroda and quantitative easing funds would have been for naught.
The economic calendar will bring little answers to the main question on investors' minds, for that they will have to seek guidance from political and monetary policy leaders in a world where the unknowns far outnumber the known facts. Finance ministers from around the globe will make comments during the weekend which could make moves when trading week starts at the Asian session open. Spanish votes will vote on the rerun of general elections with polls showing a divided electorate.
The ECB will host its Forum on Central Banking in Portugal on Monday, June 27. The three-day conference includes ECB President Mario Draghi, Fed Chair Janet Yellen and BoE Governor Mark Carney. Unconventional monetary policy tools and the fallout of Brexit are sure to be topics of discussion.
The U.S. will release the final gross domestic product (GDP) for the first quarter. A slight improvement over an earlier estimate is expected, with the U.S. anticipated to show a 1.0 percent growth in Q1. The U.K. will announce its first-quarter GDP and current account on Thursday, June 30. Manufacturing purchasing manager indices will be published in the U.K. and the U.S. on Friday, July 1. The week of July 4 to July 10 promises to bring back fundamentals back to the forefront after a week where traders will be going on limited information and central bank and politicians' rhetoric.
Market events to watch this week:
Monday, June 27
European Central Bank (ECB) Forum on Central Banking
Tuesday, June 28
European Council Summit to Discuss Brexit
8:30 am USD Final GDP q/q
10:00 am USD CB Consumer Confidence
Wednesday, June 29
10:30 am USD Crude Oil Inventories
Thursday, June 30
4:30 am GBP Current Account
8:30 am CAD GDP m/m
8:30 am USD Unemployment Claims
9:00 pm CNY Manufacturing PMI
9:45 pm CNY Caixin Manufacturing PMI
Friday, July 1
4:30 am GBP Manufacturing PMI
10:00 am USD ISM Manufacturing PMI
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar