Gold Surges, Markets in Turmoil in Brexit Shocker

Europe and the UK awoke to historic news on Friday morning, as Britons have voted in favor of exiting the European Union. The British pound has plunged, while gold has jumped sharply, pushing above the $1300 level since the referendum outcome was announced early on Friday. British Prime Minister David Cameron has vowed to respect the outcome of the vote and also announced his intention to resign in the next few months. On the release front, there are two key US events on the schedule – Core Durable Goods Orders and UoM Consumer Sentiment.

Shocking, extraordinary, a political earthquake. There are shock waves in the UK and across Europe, following a stunning decision by the UK to exit the European Union. Polls leading up the race had showed a very tight race, while the financial markets expecting the Remain camp to win. This was 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.

XAU/USD Fundamentals

• 8:30 US Core Durable Goods Orders. Estimate 0.1%
• 8:30 US Durable Goods Orders. Estimate -0.5%
• 10:00 US Revised UoM Consumer Sentiment. Estimate 94.2
• 10:00 US Revised UoM Inflation Expectations

*Key releases are highlighted in bold

*All release times are EDT

XAU/USD for Friday, June 24, 2016

XAU/USD June 24 at 3:50 EDT

Open: 1267.46 Low: 1263.87 High: 1358.41 Close: 1316.27

XAU/USD Technical

• XAU/USD has surged and broken through several resistance lines on Friday.
• 1307 is providing support
• There is resistance at 1331
• Current range: 1307 to 1331

Further levels in both directions:

• Below: 1307, 1279, 1255 and 1232
• Above: 1331, 1361 and 1388

OANDA’s Open Positions Ratio

XAU/USD ratio is unchanged on Friday, despite the sharp gains by XAU/USD. Long positions have a majority (60%), indicative of trader bias towards XAU/USD continuing to move to higher levels.

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.