US Seen Lower as Brexit Blues Kick In

It’s been a rocky start to the European session on Tuesday, with general risk aversion being seen throughout the markets as ongoing reports of post-Brexit difficulties takes the wind out of the sails of last week’s rally.

Nothing has necessarily hit the fan as of yet but there are a growing number of negative reports circulating off the back of the U.K.’s decision to leave the E.U. and this appears to be starting to weigh on sentiment. The Bank of England has repeatedly tried to reassure investors and provide a backstop for the markets, offering liquidity to banks to avoid a credit crunch, implying that it could cut interest rates this summer and this morning, cutting the countercyclical capital buffer for banks in a bid to boost lending by up to £150 billion. Mark Carney and the BoE are likely to remain quite active in the coming months to ensure investors remain as calm as possible, assuming of course he doesn’t become the latest Brexit casualty.

Manufacturing and services PMI data from the eurozone this morning pointed to a slight improvement in sentiment in June, the only issue here being that the vast majority of responses were received prior to the U.K. referendum which is likely to have an impact on sentiment going forward. It will be interesting to see in the coming months just how much Brexit dents sentiment in the eurozone, either as a result of expectations of slower growth or fears of contagion effects.

U.S. traders return to their desks on Tuesday, at the start of what is likely to be quite a busy week once again. Brexit aside, we’ll get the minutes from the June Fed meeting on Wednesday followed by the latest jobs report on Friday which should ensure markets remain quite volatile. The Fed is now unlikely to consider rate hikes in the coming months as it analyses the impact of Brexit but the minutes could still provide insight into how close they were to raising and how much of a deterrent the U.K.’s decision could be. For another hike to remain on the table this year, the jobs data will have to remain strong overall and rebound from last month’s disappointment. Today we’ll get factory orders data from the U.S. and hear from the Fed’s William Dudley.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.