By Lukman Otunuga, Research Analyst, FXTM
.jpg)
Sterling tumbled across the currency markets in Monday’s opening following the electrifying decision of London Mayor, Boris Johnson, to join the Brexit campaign which amplified fears over the UK leaving the European Union. This unexpected move reversed Friday’s gains and almost quashed David Cameron’s efforts to secure a special EU reform deal ahead of the referendum which his own Eurosceptics were already heavily criticising.
The Brexit topic is quite intricate and, although rating agencies have branded it as negative for the UK economy, for every pro there is a con and this may be the theme which will rattle the markets in the coming months. With anxieties elevated ahead of the pending referendum on June 23 and economic uncertainties of the possible implications of a Brexit weighing heavily on sentiment, the pound may be left vulnerable and open to further losses moving forward.
It will be interesting to hear Bank of England Mark Carney’s thoughts during the inflation report hearing on Tuesday towards the latest Brexit developments which have added to the UK’s woes and diminished any surviving expectations of UK rates being raised in 2016. Inflation is another jigsaw in the UK which has remained notoriously low and provided very little incentive for the BoE to take any action, while GDP growth currently faces headwinds from the global woes which have exposed the UK to downside risks. Carney may sound dovish and solemn and this should encourage sellers to attack the Sterling against the Dollar once again.
Speaking of the GBPUSD, the pair suffered extreme losses on Monday with prices plummeting to fresh 7-year lows at 1.4057 and may decline further as concerns intensify over the impact of a Brexit. From a technical standpoint, this pair is heavily bearish as prices are trading below the daily 20 SMA while the MACD trades to the downside. Previous support at 1.4200 may become a dynamic resistance which should encourage a further decline towards 1.400 and potentially lower.
Stock markets driven by Oil
The global stock markets received an unexpected welcome boost on Monday buoyed by the rebound in oil markets which had nothing to do with an improved sentiment towards oil or the global economy. Asian equities started Tuesday noticeably flat showing signs of exhaustion with the Shanghai Composite Index trading -1.26% lower as investors shift their focus towards the state of the global economy. Although European and American equities may continue to enjoy short term gains, the factors which have left global stocks heavily depressed remain intact.
Fears over slowing global growth from various dimensions still linger in the background while these short-term rallies in oil prices only provide a foundation for sharper lower declines which consequently will pressure stocks. We are already in an age of negative interest rates which illustrates the bad health of the economic landscape and the Federal Reserve’s hesitance to respect its pledge to raise US rates should keep investors alert for what the future holds.
Eurozone under pressure
The growing speculation that a Brexit may spill over to the Eurozone and threaten the future of the European Union has already encouraged bearish investors to attack the Euro across the currency markets. These speculations mount to the headwinds faced over faltering inflation levels which have been the product of falling oil prices while global woes continue to expose the Eurozone to downside risks. The German Ifo business climate report will be released on Tuesday and if this signals further weakness in Europe, expectations may rise towards further stimulus measures to be unleashed by the ECB in March.
The EURUSD breached below the psychological 1.105 support during trading on Monday which was also below the daily 20 SMA. Previous support at 1.105 may become a dynamic resistance which should encourage a further decline towards 1.095.
Commodity spotlight – WTI
WTI Oil experienced an exaggerated upsurge on Monday with prices clipping $31.48 after the IEA predicted that U.S. shale oil production may shrink by 600,000 bpd in 2016. The prospects of less supply in the heavily saturated oil markets have provided a relief rally for bears to send prices crashing lower when the reality of this complex situation hits investors. The prisoner’s dilemma that OPEC and non-OPEC members continue to face combined with the visible conflict of interests from various parties should keep oil prices depressed for an extended period. From a technical standpoint, bears need to break back below $30 for a solid decline towards $25.
For information, disclaimer and risk warning note visit: www.ForexTime.com
FXTM is an international forex broker regulated by the Cyprus Securities and Exchange Commission (CySEC), and FT Global Limited is regulated by the International Financial Services Commission (IFSC)
