Brexit Fears Started to Materialize; GBP/USD and U.S. Indices

The British pound fell to a fresh 31-year low at 1.2800 early on Wednesday as the Bank of England relaxed regulations to encourage banks to lend out money. The BoE Governor had a speech yesterday and outlined the additional tools will use to support the UK economy on the way out of the European Union, however he explained that even though central bank’s post-Brexit plan is working they cannot fully offset the post-Brexit volatility. In addition, he expressed his concerns for the sharp pound declines following Brexit, though he added that a weak currency helps exporters.

Carney said that the “The bank can be expected to take whatever action is needed to promote monetary and financial stability, and as a consequence, support the real economy.” The first and most tangible tool BoE officials will apply is to provide liquidity in the market with the one or the other way. Firstly, they relaxed the lending regulations and we will not be surprised if they cut the borrowing rate in the next policy meeting on July 14. The Financial Policy Committee cut the capital requirements of banks, freeing up 150 million pound to be lent to firms and individuals.

While Carney is ready to use all the available tools, UK is expected to slide in recession. Some analysts have forecasted UK’s way to recession even before the EU referendum shock result. The UK construction shrunk unexpectedly by the sharpest pace since 2009 in June, according to Purchasing Managers’ Index released on Monday.


Pound in Free Fall after Brexit Vote
The GBP/USD pair remained under pressure as it continues the free fall, following the Brexit vote, extending its decline to 1.2790, level last seen in November 1985. The British pound fell more than 10% against the U.S. dollar following the EU referendum. It’s worth noting that the pair fell for a second consecutive month (May -0.92% and June -8.06%) and is now on track for its third negative month, -3.10% so far this month.

The technical outlook favors the downside as in the daily chart, the technical indicators have turned sharply lower within a bearish territory. In the 4-hour chart, technical readings also favor a downward continuation, with the price extending below all of our moving averages (50-SMA, 100-SMA and 200-SMA). In addition, the 50-SMA, as well as the 200-SMA are now acting as dynamic resistances around 1.3500 and 1.4000, strong technical and psychological levels. Therefore, for now, we remain bearish on this pair, targeting 1.2750 and then 1.2700. From the latter level, a possible rebound should be accompanied with the break of the oscillators above their mid-levels to confirm a pullback and the start of the correction phase. Without that confirmation, we remain strong sellers.


UK weakness has spread to U.S. Indices
As the consequences of UK’s decision to quit the European bloc started to appear, sending the sterling to unprecedented three-decade lows the worries over global growth culminated plunging the stock markets.

In the U.S., the S&P 500 index lost 14.40 points, or 0.7%, to close at 2,088.55. The large-cap index had dropped to a low of 2,076 during the session but the daily 50-SMA provided a strong support to the index. Slightly below there, the 100-SMA is also ready to provide a support to the index in a case of a further fall. However, the selling pressure remains on the cards and a break below the 2,076 barrier would open the doors towards the 2,061.

The Dow Jones Industrial Average, plunged 0.61% to end at 17,840, bouncing back from its intraday low of 17,785. Technically, it is very significant that the index is trading below of some significant obstacles, including the 18,136 and the 18,385 barriers. This picture could prompt the continuation of the upward move, which is our next scenario, with the next possible target being those two levels.

The Nasdaq Composite index fell 0.8% or 39.67 points to close at 4,822, after trading as low as 4,797. The index fell below the moving averages (50-SMA, 100-SMA, and 200-SMA) on the daily chart and as of that, the next level to watch will come at 4,370. The weekly chart also suggests that further downside momentum is possible; thus below 4,370 would head towards the 4,364, which should be a strong support.

It’s notable that for the year the Dow Jones is up 2.4%, the S&P 500 is up 2.2% and the Nasdaq index is up 3.7%.

What to watch today:
Much of the interest today will be on the FOMC Minutes, with traders hoping for a clue as to when the Federal Reserve will pull the trigger on the next rate hike. Elsewhere, Mario Draghi will be speaking, while from the U.S. we get the ADP jobs report on Thursday (expected: +159K), ahead of Friday’s NFP (expected: +178K).