For FX – Its All About Article 50

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Market Drivers June 26, 2016

Osborne -no emergency budget
Japan mulls 10T stimulus
Nikkei 2.39% Dax -0.70%
Oil $47/bbl
Gold $1330/oz.

Europe and Asia:
NZD Trade Balance 358M vs. 180M

North America:
USD Trade Balnace 8:30
USD PMI Services 9:45

More turbulence in the currency markets as the start of the fresh week saw further weakness in the pound with the cross falling to new lows of 1.3247 in morning London dealing as the impact of the Brexit vote continued to reverberate across the globe.

Fresh pressure on the pound came when another set of Labor MPs threatened to resign over what many consider to be the botched up job of handling the Leave vote by Labor Leader Jeremy Corbyn. With both UK major parties in turmoil over the Brexit vote the political situation in UK remained highly uncertain only adding to the volatility in the marketplace.

The Tories also appeared to be in a disarray as many of the key figures in the Leave movement appeared to backpedal on some of the principal promises of the campaign and the UK leadership has yet to consider invoking Article 50 which would be the formal signal that the country plans to withdraw from the EU.

Indeed Article 50 is the only matter at hand, as it is the only way for UK to actually leave the European union. Clearly there is very little desire on the part of UK policy makers to initiate this process and several analysts have pointed out that the longer the country delays the greater the possibility that Brexit may not occur.

EU Finance ministers have already started to apply the pressure on the British to begin the process, as many Continental authorities fear that a prolonged withdrawal process could create a very unhealthy period of uncertainty that would freeze investment planning and further weaken the economic conditions in the region. However, with UK political structure in turmoil it is unlikely that the country will do anything with respect to Brexit until Mr. Cameron steps down from Prime Ministership in October.

Meanwhile the markets remain a cauldron of volatility as lack of clarity on the resolution of Brexit continues to weigh heavy on financial assets. Over the weekend supporters of Remain managed to harness 3 million votes for a petition for a second referendum, but many analysts doubt that a second vote would take place. Still given the momentous implications of Brexit and the fact that the vote did not come close to a super majority win provides good legal reasons for a possible revote and that may be the direction that political leaders move to in order to begin to resolve the issue. Absent any democratic resolution the “muddle through” approach is likely to only create a much worse climate of uncertainty and send cable drifting lower as the days proceed.

Boris Schlossberg
Managing Director

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