Market Drivers June 27, 2016
Osborne – will not stand for PM
Japan’s Inada – should act if FX moves too rapid
Nikkei 0.09% Dax 2.06%
Europe and Asia:
USD GDP (3rd Revision) 8:30
USD Consumer Confidence 10:00
After several days of extraordinary volatility currency markets calmed significantly on Tuesday with most of the major pairs settling down into relatively tight ranges as short covering helped to fuel a rally in high beta FX sending cable above 1.3300 and euro towards 1.1100.
There were no new developments on the Brexit front as UK politicians continued to mull their choices. Finance minister George Osborne who was a staunch supporter of Remain took himself out of the running for the Prime Ministership office and both parties now are in the midst of a leadership vacuum as they try to figure out the next move.
At the EU economic summit the leaders appeared to be split into two camps – those like the EC commissioner Juncker who want UK to begin its exit immediately and those like Angela Merkel who are willing to wait and not pressure the Brits. In either case the EU officials are in unanimous agreement that no informal talks will take place until UK invokes Article 50.
Ms. Merkel may be playing the waiting game, hoping that as time proceeds UK officials will be more and more reluctant to invoke the separation rule therefore keeping UK in the EU on de facto basis. There have been some calls for a second referendum and the petition to do so has already garnered more than 4 Million votes, but so far there appears to be little appetite for such a move. Yet the longer the UK does nothing the more likely alternative plan will be put in place.
With Mr. Cameron essentially a lame duck Prime Minister and with possibility of new parliamentary elections to take place the swift exit of UK from EU is looking less likely each day. The markets therefore have decided to take a breather from all the gloom and doom over the past few days and started to stage a mild short covering rally with EUR/USD taking out the 1.1100 level in pre-NY trade while cable rose to a high of 1.3373 before giving up some of its gains.
For now however this remains a strictly short covering rally and the downward pressure could quickly resume if UK policy makers push for a quick exit. The markets will continue to be a headline driven roller coaster for the foreseeable future.