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Risk Wins!

Risk Wins!

Trading on early Monday has seemingly presented risk takers with a green light. FX markets have seen the USD The USD The USD is the official currency of the United States of America. It is the largest reserve currency... More is the official currency of the United States of America. It is the largest reserve currency... More lose significant ground to the GBP The GBP The GBP is the official currency of the United Kingdom. The GBP is a major currency and currently ra... More is the official currency of the United Kingdom. The GBP is a major currency and currently ra... More and EUR The EUR The EUR is the official currency of the European Union. Presently 19 out of the 28 collective  nati... More is the official currency of the European Union. Presently 19 out of the 28 collective  nati... More . Nearly all of this positive momentum for the GBP and EUR against the USD has been caused because of a significant change in sentiment generated from recent polling about the Brexit vote that will be held this Thursday. The GBP had been sold off widely or at the least hedged by many financial institutions since the beginning of this year, which feared that the U.K. would vote to leave the European Union. Since the murder of lawmaker Jo Cox last week in the U.K., public opinion has seemingly moved significantly to the ‘remain’ camp.

This week is short on major economic data in many respects. However, not only is the Brexit vote taking place, but Fed The Federal Reserve The Federal Reserve is the Central Bank of the United States of America and sets the monetary policy When used by traders and investors monetary policy When used by traders and investors monetary policy When used by traders and investors monetary policy usually refers to Central Bank policy concerning ... More usually refers to Central Bank policy concerning ... More usually refers to Central Bank policy concerning ... More ... More is the Central Bank of the United States of America and sets the monetary policy... More Chairwoman Janet Yellen is testifying in front of Congress tomorrow and on Wednesday. Typically the Senate and House of Representatives press the Fed The Federal Reserve is the Central Bank of the United States of America and sets the monetary policy... More Chairperson with rather pointed questions, but do not look to cause a firestorm. Tuesday’s questioning could be different in the U.S. because it is an election year and Republicans will be keen to get their opinions heard and Janet Yellen may face criticism that she is not accustomed to from politicians in a public forum.

The Fed has been forced into an ultra-cautious position due to economic activity that has not met their standards for an increase in interest rates. The Federal Reserve The Federal Reserve The Federal Reserve is the Central Bank of the United States of America and sets the monetary policy... More is the Central Bank of the United States of America and sets the monetary policy... More started to openly say they would increase rates starting about this time last year, but in fact they have only raised rates once – in December of 2015 by a quarter of a point. Recent jobless numbers have been lackluster, last week’s Unemployment Claims did not calm the waters. If Janet Yellen is forced to admit that the Fed remains only moderately optimistic about the U.S. economy and that it will have to sit and decipher data at least until August to consider another hike, this could be a strong sign that the USD will be put into play from speculators and ‘smart money’ – meaning financial institutions.

A cautious Federal Reserve paired with a vote via the Brexit that decides to stay in the European Union could put the FX markets into a furious charge higher for the GBP, EUR and other currencies against the USD. It is clear that the GBP has come under significant pressure this year. And while it has made good gains in trading today, there is still a large amount of value that is missing from its known long-term range versus the USD. If an investor feels that the Brexit outcome will be to remain in the E.U. on Thursday, they could very well have the inclination to believe that the GBP has plenty of room to run upwards. Positive sentiment generated for the GBP because of a ‘remain’ result should also shed a bright light on the EUR, which has also faced headwinds due to concerns surrounding the potential of a Brexit.

The global economy continues to struggle, stagnation The term stagnation The term stagnation The term stagnation in economics means a period of time in which an economy is achieving little grow... More in economics means a period of time in which an economy is achieving little grow... More in economics means a period of time in which an economy is achieving little grow... More is still part of the landscape internationally, demand for commodities remains muted, and investors would love a dose of positive certainty. Whether it is right or wrong to stay in the E.U. is not the question investors need to be concerned with, the key point is what the outcome of the vote will be. If the Brexit vote succeeds in keeping the U.K. in the European Union it will be one less thing to worry about for financial institutions globally and they are likely to put risk back on the table.

And now for the interesting part mid-term, if the U.K. decides to stay in the E.U. it will not be a surprise to see the GBP re-attain values between 1.53 – 1.55 against the USD. The EUR could also see a nice climb upwards and find itself between 1.15 – 1.17 versus the USD. There are plenty of opportunities for traders to take advantage of in the markets if they are able to navigate the Brexit vote and Janet Yellen’s testimony this week.