The widespread reaction to the United Kingdom’s decision to leave the European Union (EU) has dramatically changed the technical conditions across the Foreign Exchange market. While the “Brexit” was clearly a political event, it has acutely altered the market’s “group psychology”; which is the cornerstone of technical analysis.
For example, the GBP/USD traded from a new yearly high, at just above 1.5000, to its lowest level in 30 years in less than 8 hours; the widest trading range in the history of the pair. From a technical perspective, it’s reasonable to believe that stop levels and option positioning were all wiped out on Friday. In this sense, if price support is where buyers are enticed, and price resistance is where sellers offer supply, then technical levels of the GBP will have to be rebuilt over time.
As a result of the breakdown of many technical components, volatility looks to be the name of the game for the short to mid-term. Fears that the UK’s exit will inspire other nations to do the same are not unwarranted, and FX investors should be cognizant that Brexit is not an uniquely European problem. All global financial markets have been propped up by central bank policy makers; especially from the ECB, FED and the BoJ.
As such, the FX market may show a blithe response to most of the economic releases on this week’s schedule. However, now that the FED FUNDS futures market has entirely priced out any rate normalization for 2016, Tuesday’s US GDP report could get a rate adjustment back on the radar. The final reading for Q2 GDP is forecast to print at 1%, which is twice as strong as the last GDP data. In addition, US Consumer Confidence is due early Wednesday morning and is expected to show a sharp rebound to 93.1%.