The forex market on Wednesday morning saw the pound struggling to the gains when fresh polls showed support for remain was narrowly ahead of the exit camp, contradicting surveys released on Monday and at the weekend which had suggested the campaign for Brexit was ahead.
The pound sterling did however enjoy a small bounce on the back of some strong UK industrial data which showed manufacturing production expanded at its fastest pace since July 2012, rising by 2.3% month-over-month in April. This helped total industrial production to rise 2.0% on the month, easily beating expectations for a flat reading. But the pound’s response was fairly muted, suggesting that Brexit concerns were holding forex market traders back from making bold bullish bets.
Indeed, with the EU referendum just a couple of weeks away and sterling’s 1-month volatility being at the highest levels since the financial crisis, not many people are in the mood to hold onto their positions for long. Traders are rightly being nimble as they take advantage of short-term volatility.
In fact, there has been evidence of forex market capital outflows from the UK, which goes to show how sour sentiment has turned in recent months. According to Sky News, citing data from the Bank of England, some £65 billion either left the UK or was converted into other currencies in March and April. This was the fastest rate of capital flight recorded since the financial crisis in early 2009. In March alone, outflows totaled £59 billion – the second biggest single-month fall on record. This may have been due to the fact that March was the first full month of the referendum debate after Boris Johnson joined the Leave campaign.
Hedging or outflows are likely to have risen further as we got closer to the June 23 referendum, providing strong downward pressure for the pound. But it should be noted that in the event the UK public votes to stay in the EU, sterling should, in theory, stage a sharp relief rally. So, the UK forex market currency may be down now, but it is certainly not out…yet.
Among the pound pairs, the GBP/CHF looks the most interesting today. As can be seen from the daily chart, the rally since the beginning of April stalled at around the 200-day moving average before price tested and subsequently broke back below the prior resistance level of 1.4210/25 area. Yesterday, the GBP/CHF initially rallied but the advance was rejected quite sharply upon the re-test of this area, causing it to close roughly where it had opened. As a result, the cross formed a long-legged doji candle, which effectively shows indecision. Now that the low of this doji candle and the 50-day moving average have both broken down, we may see some further follow-through in the selling pressure.