British Pound May Bounce as Markets Digest Brexit Blood-Letting

Talking Points:

• Brexit aftermath remains in focus as EU leaders gather to craft response
• Clear-cut direction cues may be lacking as UK delays formal exit trigger
• Pound may rise with risky assets as Yen, US Dollar retrace recent gains

A quiet data docket in European trading hour is set to keep the aftermath of last week’s UK referendumin the spotlight. The European Parliament will convene for a special session to produce an official “Brexit” resolution. EU heads of state are also gathering in Brussels for a two-day European Council meeting to discuss how to proceed after last week’s events.

The appearance of concrete specifics on the UK’s departure from the regional bloc is unlikely. Article 50 of the Treaty of Lisbon offering a broad outline of exit procedure is yet to be invoked so the EU/UK rupture has not been set in motion formally. This sit-down will focus on proposing a “new impulse” for the EU, according to comments from German Chancellor Angela Merkel yesterday.

Presumably, that portends a range of broad policy proposals aimed at boosting the EU’s appeal among the region’s disgruntled citizenry to counter Brexit-inspired eurosceptics in other member states. It seems unlikely that the meeting will produce much more than vague platitudes. Still, the markets’ touchy disposition since last week’s blood-letting means it remains a potent source of potential event risk.

Assuming the absence of fresh fodder fueling the Brexit narrative however, a bit of corrective price action may be in order across the asset spectrum as shell-shocked investors digest recent volatility. Indeed, the Pound is already on the upswing alongside commodity-bloc currencies and share prices while the Yen and US Dollar declinein Asian trade. S&P 500 futures point firmly higher, arguing for more of the same ahead.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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