Markets stabilize but have Brexit jitters subsided?

Global stocks weathered the Brexit blues during trading on Wednesday with most major markets clawing back previous losses as optimism grew over central banks intervening to stabilize the post-Brexit turmoil. Sentiment towards the global economy continues to show signs of improvement with the renewed risk appetite encouraging investors to seek riskier assets.

Asian stocks were elevated from Tuesday’s stock market rally and propelled higher on Wednesday from the growing expectations over the Bank of Japan expanding on stimulus measures. European equities seized the positivity from Asia and surprisingly strolled back into the green territory despite the growing uncertainty over the UK’s future. Although Wall Street could lurch higher from the bullish momentum borrowed from Europe, questions may be asked if this stock market rally is just another dead cat bounce.

While more short term gains in stocks may be realized as speculations rise towards the central banks mitigating the turmoil in the financial markets, the fundamentals which have been dragging prices lower have not changed whatsoever. Fears over diminishing global growth may weigh on global sentiment, while the Brexit woes could leave most central banks cautious. It should be kept in mind that overall confidence towards the global economy is fragile and this relief rally could come to an end when the risk-off trading environment motivates investors to scatter from riskier assets to safe-haven investments.

Sterling bears on a tea break

The Sterling staged a slight recovery on Wednesday with the GBPUSD piercing back above 1.3350 as a combination of profit taking and easing Brexit anxieties provided a foundation for bulls for pounce. Regardless of short term gains, the Sterling remains bearish and could be destined for further declines when the persisting uncertainty over the immeasurable impacts of a Brexit haunt investor attraction towards the currency.

Many questions remain unanswered post-Brexit, while uncertainty mounts as fears grow over the UK having no clear path to leaving the European Union. With expectations dangerously increasing that the Bank of England could slash UK rates in the events of a Brexit fueled recession, any true recovery in the Sterling’s value may have been sabotaged. Another sharp decline could be pending and the catalyst may be the clarity provided when the Article 50 is triggered. From a technical standpoint, the GBPUSD is heavily bearish and sellers could exploit this relief rally to send prices lower. Previous support at 1.3850 could transform into a potential resistance that invites sellers to send the GBPUSD back towards 1.3200.

EU Summits commences… without the UK

European Union leaders have begun their discussion on a range of critical global and economic issues in the summit without Britain as they search for stability post-Brexit. The Brexit has left the Eurozone under extreme pressure with the growing concerns over other countries leaving the bloc posing one of the greatest challenges presented to European leaders. Mario Draghi has already expressed his sadness over the Brexit victory while expectations continue to heighten that the European Central Bank takes action in a bid to reviving Eurozone growth. Weak GDP growth and static inflation have punished the European economy and the Brexit adding to the mix weighs heavily on Eurozone sentiment. The EUR could be set for a slippery decline if the growing Brexit anxieties encourage market participants to relinquish their Euros for safer currencies such as the Dollar and Yen.

Gold finds support above $1308

Gold found minor support above $1308 during trading on Wednesday as a mixture of Dollar weakness and risk aversion from the Brexit jitters ensured the metal remained buoyed.  This precious metal remains fundamentally bullish and could be poised to trade towards $1350 as the Brexit concerns impact US rate hike expectations.  Further Dollar weakness and a flight to safe-haven safety amid the global uncertainty could provide bulls a foundation to install another heavy round of buying. From a technical standpoint, prices are trading above the daily 20 SMA while the MACD has crossed to the upside. Previous resistance around $1308-1300 could act as a dynamic support which triggers an incline towards $1350.

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 Otunuga is a research analyst at FXTM