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The 28-nation European Union is on the verge of a dissociation after Britain’s EU referendum’s results on Friday came in with a shock vote for Britain to leave the EU. The Euro has been under downward pressure as Brexit has clouded the future of the European Union. The currency fell significantly from 1.14282 to as low as 1.09078, the lowest level since the middle of March on Friday, and has recovered slightly today as investors locked in their profits. However, in the long-term, a further plunge is inevitable as the market fears political and economic uncertainty regarding what happens next.
The Brexit could spark a domino effect across the rest of the continent, as forces of economic nationalism and anti-immigration politics have already been gaining ground. The EU has been forced to raise a firm call requesting the Britain to “leave as soon as possible” after right-wing parties in various countries including Netherlands and France have already called for similar referendums in those countries in an attempt to break away from the union.
For the Eurozone’s economy, this event can have significant negative consequences. Multinational businesses could refrain from making major investments in this uncertain economic environment. Without any contributions from its second largest economy, EU will now have to find alternative means to solve its own financial problems such as Greece’s bailout. Moreover, the labor market will also be placed under enormous stress as a large number of Britons are working and contributing towards local economies across the EU, and a large and significant number of people from the other 27 EU members are living and working within the UK. There is a rising belief that the ECB may take unconventional measures to inject cash into the economy and boost the market’s confidence.
US officials indicated their concerns that the Brexit could weaken US growth if the EU’s economy – the country’s largest trading partner, takes a hit from Britain’s decision. The demand for US exports will decline as consumer confidence decreases and the dollar strengthens. According to Janet Yellen’s testimony to Congress last week, the event could significantly affect financial conditions, pushing back the Fed’s plan to raise interest rates this year.
Investors are looking at central banks for their indications on possible measures to reduce market volatility, as well as support economic growth in the Eurozone. The European Central Bank is holding a three-day meeting in Sintra, Portugal, at which its president, Mario Draghi and Fed Chair Janet Yellen will deliberate and speak about global economic conditions and recent events.
Fig. EURUSD D1 Technical Chart
EURUSD opened Monday’s session with a weekend gap down at 1.10051. The price has pulled back slightly to around 1.10364 but is still under pressure from the two moving averages above. RSI is at 38 and pointing to the oversold zone, suggesting a strongly bearish market. The trend indicator is encouraging short positions as the red arrow has appeared above the price movement. The price is expected to cover the gap before retreating and testing the support level at 1.09078.
Buy Digital Put Option from 1.10426 to 1.09067 valid until 20:00 June 30, 2016