EUR/USD – Europe in Shock, Euro Slides as Britain Votes LEAVE

Europe and the UK awoke to shocking but historic news on Friday morning, as Britons have voted in favor of exiting the European Union. Both the euro and pound have plunged, with the euro dropping 250 points since the referendum outcome was announced early on Friday. On the release front, German Ifo Business Climate will be released. In the US, there are two key events on the schedule – Core Durable Goods Orders and UoM Consumer Sentiment.

The outcome of the Brexit vote is being described as a political earthquake. Polls had showed a very tight race, while the financial markets were expecting the Remain camp to win, as evidenced by the British pound moving higher throughout the week. At the end, the Leave camp won the day, garnering 52% of the vote. The markets have reacted sharply on Friday, with the pound plunging to 30-year lows and the euro dropping 2.2%. The markets were volatile throughout Thursday night, and we could see further volatility in the currency and financial markets during the Friday session. It’s hard to gauge the extent of the economic fallout so soon after the vote, but there’s no doubt that the UK and the European Union are entering into uncharted territory and a period of instability and uncertainty. The dramatic and unexpected decision to leave the EU will undoubtedly have unpredictable economic and political consequences, perhaps for years to come. The UK economy of GBP 2.9 trillion is the fifth largest in the world and number two in Europe, after Germany. Will the EU survive Brexit? There is clearly shock and dismay across the European Union that the club is losing such an important member, and the vote to leave is likely to boost separatist causes in Europe that seek independence, such as Scotland and Catalonia. As for the financial markets, safe-risk assets are the big winners immediately after the vote. Gold has jumped as much as 7.5 percent on Friday, and the Japanese yen has gained 2.2 percent.

Overshadowed by the Brexit referendum campaign was testimony from Janet Yellen before Congress earlier this week. Yellen was cautious and tentative, and failed to provide any hints about the timing of a rate hike. She acknowledged that the US economy could be stronger, saying that “[c]onsiderable uncertainty about the economic outlook remains”. Yellen said that she’s “hopeful that we will see a pickup in growth”, but skeptics might respond that the markets want to see action from the Fed and not just hope. The Fed has clearly been out of sync with the markets, as underscored by the Fed’s statements back in December that it might raise rates in 2016 up to four times. Meanwhile, here we are in June, and there’s no clear indication that the Fed will raise rates at all this year. In her testimony, Yellen said she does not expect the US economy to enter a recession, but if such a scenario did occur, the US would not follow Japan and Europe and adopt negative interest rates. On a more positive note, Yellen said that weak oil prices, low interest rates and stronger wage growth should support consumer spending.

EUR/USD Fundamentals

Friday (June 24)

• 8:00 German Ifo Business Climate. Estimate 107.6
• 8:00 Italian Retail  Sales. Estimate 0.2%
• Tentative – Eurozone Long Term Refinancing Option
• 12:30 US Core Durable Goods Orders. Estimate 0.1%
• 12:30 US Durable Goods Orders. Estimate -0.5%
• 14:00 US Revised UoM Consumer Sentiment. Estimate 94.2
• 14:00 US Revised UoM Inflation Expectations

* Key releases are in bold

*All release times are GMT

EUR/USD for Friday, June 24, 2016

EUR/USD June 24 at 6:40 GMT

Open: 1.1328 Low: 1.0906 High: 1.1336 Close: 1.1018

EUR/USD Technical

• EUR/USD continues to post gains and break past resistance lines. The pair was flat in the Asian session and has posted strong gains in European trade
• 1.1376 is fluid and has switched to a support role. It could see further action during the day
• There is resistance at 1.1495

Further levels in both directions:

• Below: 1.1376, 1.1278, 1.1150 and 1.1054
• Above: 1.1495, 1.1616 and 1.1712
• Current range: 1.1495 to 1.1616

OANDA’s Open Positions Ratio

EUR/USD ratio has shown significant gains in long positions, consistent with strong losses by EUR/USD on Friday, which has covered short positions. Short positions have a majority (54%), indicative of trader bias towards EUR/USD continuing to move lower.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.