EU Referendum Watch Brexit fears rise in Germany fall in Britain

With less than a month to go until the EU referendum, new forward-looking economic data released today suggests concerns about the possibility of Britain leaving the European Union is hurting investor sentiment in Germany. However, their concerns may be unjustifiably high as a fresh poll in the Telegraph showed the ‘remain’ camp was building a more decisive lead in the EU-UK referendum campaign. Consequently, the EUR/GBP slumped as the euro fell on the back of weaker data and the pound soured on further receding of Brexit fears.

The closely-watched ‘expectations’ survey from Germany’s ZEW dropped by 4.8 points to 6.4 this month when a reading of 12.1 was expected. German investors and analysts also expressed pessimism for the Eurozone as a whole.

Professor Achim Wambach, PhD, President of ZEW, said that “the strong growth of the German economy in the first quarter of 2016 appears to have surprised the financial market experts. However, they seem not to expect the economic situation to improve at the same pace going forward. Uncertainties regarding developments such as a possible Brexit currently inhibit a more optimistic outlook.”

The disappointing ZEW figures follow yesterday’s weaker-than-expected Eurozone PMI data, although purchasing managers in the German services and manufacturing sectors reported rising activity.

The Telegraph’s EU referendum poll, conducted by the ORB, showed the ‘remain’ camp had a lead of 13 percentage points at 55 per cent compared to 42 per cent backing the ‘leave’ camp.

EUR/GBP’s bearish momentum gaining momentum

The EUR/GBP’s bearish momentum is strengthening after the cross recently turned around at 0.7930 before dropping sharply. As we reported on Tuesday of last week, this was previously a key resistance-turned-support level and here it has formed the right shoulder of a ‘Head and Shoulders’ reversal pattern. This pattern will be completed if the neckline around the 0.7655-0.7685 area breaks down decisively now, which looked likely when this report was written.

If the abovementioned neckline breaks down as we suspect it might, the EUR/GBP may then suffer from fresh momentum selling towards the targets shown on the chart. Among these, the 161.8% Fibonacci extension of the counter-trend rally to the right shoulder area comes in around 0.7605, while the 50% retracement of the more significant upswing from the November 2015 low to the recent high comes in at 0.7550. Meanwhile, the 200-day moving average meets the support trend of the bearish channel around 0.7515. In the event of a major sell-off, the projected Head and Shoulders target may be met at 0.7200 (this is the difference from the height of the pattern minus the neckline).

As things stand, a rally above prior support-turned-resistance area of 0.7735-50 would be deemed a bullish development in the short-term outlook, in which case a move to the top of the bearish channel would then become likely. The bearish Head and Shoulders pattern would become completely invalid upon a rally above the right shoulder area of 0.7930. But in this scenario, price will then face further key hurdles ahead which means the potential gains could still be limited, unless of course the unthinkable happens (Brexit).