Last week was relatively negative for the Eurodollar as the pair faced a volatile UK vote on their EU membership, which despite forecasts to the contrary, ended in a majority choosing to exit the common market. Given the lack of risk priced into the EUR/USD, the pair depreciated strongly and closed Friday’s session well down at 1.1082. However, what remains relatively uncertain is the path ahead for both the Eurozone and the UK given that there is little precedence for a separation from the single market. Subsequently, a review of the week ahead is salient given that the volatility is largely expected to continue.
Last week was a watershed for the greater European Union, as well as the common currency, as Britain resoundingly voted to leave the single market. It was always forecast to be a strongly volatile week for the pair but the risk of an actual exit had largely been underestimated and not priced in by the market. Subsequently, the Eurodollar fell sharply throughout Friday’s session to close around 1.1082, as the count progressed and it became patently clear that the leave campaign was to be successful.
Moving forward, the week is likely to be highly volatile as the next steps towards activating an Article 50 exit for the UK appear relatively unclear. However, the European Union is pushing the UK to start the exit proceedings in an attempt to regain some certainty for the near term. Currently, the UK Prime Minister is relatively resistant to that direction and has suggested that he is unwilling to invoke the procedures and will subsequently leave that to Britain’s next leader, due in October. It is therefore expected that we will see plenty of volatility in the week ahead given the relative uncertainty around the UK government’s direction.
However, muddying the waters is the latest rating debacle for the UK with all of the major agencies downgrading the United Kingdom’s rating from AAA to AA whilst warning that further cuts could occur in the near future. This could cause some difficulty for the UK given that the impact upon the cost of their access to debt markets is likely to increase in-line with the lower rating. This also coincides with a sharp downgrade to the UK’s GDP forecast which is likely to be impacted by a concerted drop in foreign direct investment. Subsequently, the full extent of various downgrades is yet to be seen but it is unlikely to be positive for the Cable in the medium term.
From a technical perspective, the pair remains relatively bearish, with price action having declined sharply below the 100-day moving average and with the 12 and 30 period EMA’s trending lower. Although the pair managed to break through the key resistance around the 1.10 handle, the downside was relatively limited. Subsequently, our bias remains neutral for the week ahead, especially given the ongoing BREXIT turmoil. Support is currently in place for the pair at 1.0950, 1.0823, and 1.0807. Resistance exists on the upside at 1.1217, 1.1375, and 1.1463.
Ultimately, the Cable is likely to remain under the grips of volatility until the path forward for the UK has been settled. However, given that both Boris Johnson and David Cameron appear to be in no rush to push the Article 50 button, we could see some sharp moves for some time yet unless a third party steps in to fill the current leadership vacuum.