Caution dominated markets amid tough talk from May and Donald Trump about Europe’s economic and political institutions. British government officials trying to limit damage to the pound will speak to major banks in London before the U.K. leader sets out her vision for leaving the bloc in a speech on Tuesday, according to people familiar with the situation. Meanwhile Trump predicted that Britain’s exit will be a success that will encourage others to do the same. He also branded NATO obsolete.

“Markets are trading in risk aversion mode,” said Neil Jones, the head of hedge-fund sales at Mizuho Bank Ltd. in London. “Investors and corporates around the world are concerned by the prospect of a hard Brexit. Pound rallies are limited and weak, while plunges are harsh and prolonged.”

 

Eoin Treacy's view

When we get down to basics. The UK is betting it will not be the only country to leave the EU. If it is correct in that view then it will have made the correct decision by gaining first mover advantage and the current concerns about the form of the subsequent relationship will be academic. 

On the other hand, the European Commission has to successfully sell the idea that the UK should never have been brought in to begin with and that it can hold the remaining group of Eurozone nations together. It has to do that because the prospect of countries leaving the EU, raises the very real possibility that creditors in Germany will not be paid back the money they lent to countries like Greece, Cyprus, Italy, Spain, Portugal, Ireland et al. 

That’s a sure recipe for acrimonious negotiations so we can expect the Pound to continue to trade in a volatile manner. The Pound has been trending lower against the US Dollar since June 2014. A sequence of ranges, posted one below another is clearly evident on the weekly chart and a sustained move above $1.28 would be required to question the consistency of the medium-term move. In the course of the decline the rate paused at $1.40, $1.30 and it now testing $1.20. If the trend remains consistent a sustained move below $1.20 would increase potential for a test of $1.10. 

Major rallies by the Pound against the Euro have rolled over near €1.40, €1.30 and most recently at €1.20. The low near €1.10 needs to hold if the more than yearlong downtrend is to be challenged. 

Today marked the first lower close on the FTSE-100 in 20 sessions and highlights how impressive the Index’s rally has been of late. While there is short-term scope for consolidation, a sharply weaker Pound would likely boost nominal stock values.