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GBP/USD Posts Sharp Decline on “Brexit”; USD/JPY Rallies Amid Talk of Fresh Stimulus

By:
James Hyerczyk
Updated: Feb 29, 2016, 06:45 UTC

The GBP/USD posted its biggest loss since 2009 last week as investors increased bets that Britons would vote for a U.K. exit from the European Union at a

GBP/USD Posts Sharp Decline on “Brexit”; USD/JPY Rallies Amid Talk of Fresh Stimulus

gbpusd wednesday Jim
The GBP/USD posted its biggest loss since 2009 last week as investors increased bets that Britons would vote for a U.K. exit from the European Union at a referendum scheduled for June 23.

The selling started early in the week after London Mayor Boris Johnson decided to increase his campaign for Britain to exit the European Union. Johnson’s decision to back a “Brexit” was a serious blow to British Prime Minster David Cameron, who over the weekend announced a June 23 referendum which would decide if the U.K. remains a member of the EU.

The previous week, Cameron negotiated a deal with the EU that was supposed to offer Britain a new special status in Europe. Cameron has secured the backing of the majority of his cabinet after striking a reform deal at a European Union summit on February 19 to give Britain “special status” in the 28-nation bloc. But following the announcement, six ministers including Justice Secretary Michael Gove said they would support a vote for Britain to leave the European Union.

Weekly GBP/USD
Weekly GBP/USD

The referendum on whether or not to leave the EU will define the U.K.’s future for a generation according to some commentators. The prime minister has recognized the decision on EU membership goes to the “heart of what country we want to be”.

Moody’s credit rating agency even chimed in about the situation. It said that the “economic costs” of a decision to leave the EU would “outweigh the economic benefits”, and that it would consider “reflecting those threats to the U.K.’s credit standing by assigning a negative outlook to the sovereign Aa1 rating following a vote to exit.” Lowering the credit rating would not be good for the British Pound.

Kathrin Muehlbronner, of Moody’s sovereign risk group added, “Unless the U.K. managed to negotiate a new trade arrangement with the EU that preserves at least some of the trade benefits of EU membership, the U.K.’s exports would suffer. It would likely lead to a prolonged period of uncertainty, which would negatively affect investment.”

The GBP/USD finished the week at 1.3869, down 0.0526 or 3.655.

Weekly EUR/GBP
Weekly EUR/GBP

The EUR/GBP also benefitted from the steep losses by the British Pound, closing the week at .7877, its highest level since the week-ending December 19, 2014. The Forex pair finished the week up 0.0146 or 1.89%.

The USD/JPY reversed course during the week after posting steep losses early in the week. Buyers came in to support the Forex pair after it traded down to 111.034. The selling pressure subsided as the market neared the February 11 bottom at 110.972. Last week’s close at 113.97, put the market up 1.1480 or 1.26% for the week.

Weekly USD/JPY
Weekly USD/JPY

Buyers started to support the USD/JPY amid signs that politicians may soon provide more fiscal support boosted sentiment ahead of the Group of 20 meeting on February 26. Investors cheered signs that Japan may increase an extra budget, while China’s finance minister said fiscal stimulus should be deployed to boost global growth.

“Globally, policymakers’ mindset is moving from monetary to fiscal, so Japan’s move to create an extra budget is commendable,” said Nobuhiko Kuramochi, head investment information at Mizuho Securities Co.

Speculators reacted to reports the government was considering expanding a spending package ahead of the summer elections, driving down the Japanese Yen against the U.S. Dollar. The extra budget would amount to 5 trillion yen ($45 billion). Separately, the chairman of Japan’s ruling party’s general council said the government may take “aggressive” steps including fiscal spending.

 

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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