John J Hardy
The UK’s exit from the European Union is causing volatility in GBP, says Saxo Bank’s head of FX strategy John Hardy, and may be the start of a squeeze on sterling pairs.
Article / 24 June 2016 at 10:38 GMT

Mid-session Europe: Stunned markets assess the damage

Saxo Markets


Brexit is here and it's very real:

 Source: Saxo Bank

One of the most remarkable 24 hours in market history are in the bag, after risk appetite and sterling screamed higher ahead of the UK referendum expecting a REMAIN vote, only to encounter the harsh reality of a resounding LEAVE.

There was an expectation from a behavioural perspective, judging from key votes in the past, such as the Quebec and Scottish independence referendums, that the marginal voter would default to the status quo. That was emphatically not the case this time around and speaks to the risk surrounding future EU-related popular votes as well perhaps to the US presidential election. Central bank and policymakers' extend and pretend is feeding revulsion of the status quo – that’s perhaps the most profound takeaway. It’s also a strong rejection of globalisation.

There will be a strong official response, and central banks are likely already intervening, so there are significant two-way risks on the day, meaning that traders may want to take a reactive stance to developments. The Bank of England could cut rates by the time you are reading this, for example.

The technical key from here will be how we settle on the day and into early next week, as we still need to reserve judgement and have a look at daily closes before we can trust the initial reaction’s potential to follow through (some thoughts on levels below).

Most equity markets are now back to equilibrium from either February lows (global slowdown fears) or lows prior to last week’s rally. The pulse has slowed and markets are now reassessing what’s next.

Foreign exchange

Forex developments
EURGBP – One pair to reverse considerably from the extremes has been EURGBP, and one of our points of interest going forward will be the degree to which the Brexit feeds an EU existential crisis. Signs of this are already evident in a tremendous widening of peripheral bond spreads. If the pair is able to fully reverse this result and close below perhaps 0.7900, the bears will have a compelling case. Otherwise, if the euro retains the upper hand, the next focus point is 0.8375 and then possibly 0.8700.

USD – serving as a safe haven second to the JPY but ahead of the Swiss franc so far. If risk appetite remains in the doldrums, the dovish Fed is less likely to have an impact.

EUR – surprised that EURUSD is managing to pick itself up off the mat at all – judging the 1.10-1.1100 zone as the key resistance area if we’re to see euro weakness on new existential worries overwhelm . As this is being written, the Spanish 10-year - German 10-year sovereign yield spread has vaulted to its highest level at 180 basis points since early 2014.

JPY – judging from price action only, we have seen some intervention in USDJPY overnight, or at least strong fear of intervention, with 100.00 an obviously important level, though the price action did slip to 99.00 at one point. How determined is the Bank of Japan if the pressure continues? Quite, most likely.

CHF – EURCHF plunging to a 1.0625 area low on safe haven seeking, with the next focus coming in at 1.0500. 1.0800 is the resistance. An interesting test in the coming days/weeks on the quality of the CHF safe haven.

GBP – GBPUSD at 1.3500 was taken out this morning in a new generational low not seen since 1985 (where the low was 1.0520), but it has rebounded back above that level. Looking at 1.3800-1.4000 as the key resistance zone for the pair on the day.


FX Options volatilities
 Around 2100 GMT yesterday when the final polls came out the betting firms had “Leave” below a 10% chance. High in GBP was 1,5000 and at that time 1m GBPUSD traded at 12.5%, but when the first real result started to came in, the whole market was taken by surprise, and loads of blood has since flown in the streets. Low in GBPUSD 1,3230-ish, and high in 1m atm was 37 % implied vols.

Now the market is starting to digest the whole thing, and the feeling that the market has, is that UK will be all right, but the road ahead is difficult. Spot is slowly trading higher, and vols are starting to come off again, with 1m at 22-ish. RR in GBP are getting hammered as the big fear is now reality.

Fixed income

Bonds have staged a significant recovery from the opening gap.

Bunds backed down to the 166 level from an initial 169 spike, a 9 bps rebound in yield terms to -0.08%. XOVER was indicated more than 100 bps wider, but has seen improvement as well, although underlying market liquidity remains very soft to non-existent in many names.




European indices plummet this morning as the UK referendum ended with the Leave campaign victorious. The vote prompted UK prime minister Cameron to announce plans to step down as recession fears and lower Eurozone growth had some bourses down over 10% at one stage, wiping €650bn off the value of Europe’s shares.

Worst hit were the Eurozone banks as they suffered their biggest ever one day fall of 14+ %. UK lenders Lloyds, RBS and Barclays all plunged 16%-20%.

Gold miners profited from the flight to quality with Fresnillo and Randgold Resources rallying 11% whilst British Airway’s owner IAG fell 20% having issued a full year profits warning due to the Brexit impact.

US equity index futures trade down 3.5% in line with the global rout although all indices are comfortably off session lows.

Economic Data of the Day 

  • US Durable Goods (-0.5% expected) – 1230 GMT 
  • US University of Michigan Consumer Sentiment (94.1 exp.) – 1400 GMT

Read more

Mid-session Europe is part of TradingFloor's stable of commentary running through from the US close, through Asia to the European session. Click below to keep abreast of all the developments as they happen.

Asia:      Morning Report APAC:  Global assets pounded as GBP plummets

Europe: Morning Markets:  UK turns its back on Europe

Europe: From the Floor:  'The best day for markets in 20 years'

 Brexit campaigner Boris Johnson was gracious in victory and paid tribute to David Cameron, 
his erstwhile ally and soon-to-be ex-prime minister. Photo: BBC screengrab

— Edited by Clare MacCarthy

The Global sales Trading desk is a multi-asset team providing customised trading solutions


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail