Panic Circles Pound

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Market Drivers Feb. 24, 2016

Dax off by -2% drives EUR/JPY lowers
GBP breaks 1.4000 and slides towards 1.3900 as Brexit fears intensify
Nikkei -0.85% Dax -1.97%
Oil $31/bbl
Gold $1233/oz

Europe and Asia:
AUD Construction Work increase -3.6% vs. 2.1%
AUD Wage Prices increase 0.5% vs. 0.6%

North America:
USD New Home Sales 10:00

Panic is starting to seep into the currency market as fears of Brexit are making their presence felt not only in cable but in euro as well as risk aversion flows intensified all night with European stocks down by more than 2%.

Cable broke the key 1.4000 level in morning Asian session trade and never looked back dropping to as low as 1.3912 before buyers finally stepped in to stabilize prices by morning London dealing. Investors are becoming increasingly concerned about the prospect of UK actually leaving the European Union and although the latest polls suggest that the Leave vote has lost some momentum over the past several days the decision remains far too close for comfort as Leave and Stay camps are essentially evenly split. Furthermore fully 25% of the UK electorate has not made up its mind and therefore the sense of uncertainty is adding to the volatility of trade.

The spectre of Brexit has also opened up a pandora’s box of fears about the the European Union itself. Although it appears to be extremely difficult to legally break the Maastricht treaty, should Britain actually decide to do so it could open the way to full Eurozone fracture. Little wonder then that euro has been drifting lower along with the pound as investors grow increasingly wary of the whole region.

With no meaningful economic data on the docket, except for New Home Sales due at 1500 GMT, risk flows should drive trade for the rest of the day, For the first time in a very long while EUR/JPY is starting to act as the currency proxy for risk once again. With the pair now down below the 123.00 figure it is exerting downward pressure on EUR/USD as well. With US equities already indicating more than 1% lower in pre – market trade the risk off sentiments could push both euro and cable further down as the day proceeds. As we go to print GBP/USD has already broken the 1.3900 figure as investors panic gathers pace. Perhaps the turbulence in the capital markets will make the UK electorate reconsider their choices but until the market believes that there is a sentiment change, the volatility is likely to continue.

Boris Schlossberg
Managing Director

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