Even though I now live in the USA, many people are questioning me over the impact of the upcoming British Referendum. In 2 days, on June 23rd, The United Kingdom will be holding a public vote on whether to stay members of the European Union, or exit and go it alone once more. Obviously, I expect people to ask me what my thoughts and opinions are, considering that I am both a native Englishman and an active Forex trader too. While the many possible outcomes are endless and though it may be a very difficult question to answer, it is worth exploring the situation and events surrounding the British Pound and the final decision of the UK public.
Firstly, let me make it clear that I have absolutely no idea what way this vote will go, simply because it is all down to the public vote. To be very honest with you, it is also a challenge to formulate a solid opinion of both the positives and negatives of the UK staying or leaving the EU, mainly due to the lack of clear information that has been released to the general public in the build-up to the vote itself. In the media there has been so much ongoing propaganda released by both those in favour of staying and those not that it has become a literal minefield of opinion to wade through.
The outcomes and ramifications of Great Britain leaving the European Union are really a total mystery. If they leave, then I guess we will just have to wait and see. It’s a scary proposition as nobody really has an idea of the impact! All I know is that the UK will save itself a lot of money in yearly membership fees to be a part of the EU, billions of Pounds in fact. But there could also be other costs involved from an international and continental trading perspective as well. Will the rest of the EU members be reluctant to do trading business with the UK in the future, or will it actually encourage trade relationships due to the potential revitalization of the British economy? Maybe other members of the EU will also contemplate their membership of the Union and follow suit? The possibilities are endless.
FX traders around the world are relishing the impact of the referendum and the trading opportunities ahead. I would say that of all the questions I get, the most commonly asked is about how the vote will impact the value of the GBP. Now, this is really an even harder question to answer and here is why: A Global-Political event of this magnitude is pretty much a first for us all. I would go as far as to say that the prospect of the UK leaving the EU is on par with the possibility of say Texas or any other State leaving the USA. Simply put, it has never happened in our lifetimes and so, is very hard to really guess the impact of such an occurrence.
Based on the Supply and Demand that major banks and institutions have shown historically for the GBP as a currency, under normal circumstances I would say that the British Pound is in the right place to see a decent rally as it is so heavily undervalued right now. Looking at the chart below of GBPUSD, we can see the market is historically low and near to longer term Demand imbalances, suggesting upside potential:
However, this opinion is based on normal market conditions and not in light of the upcoming vote. When we factor the referendum itself into the equation, then it suddenly becomes a whole different story altogether.
Everyone is in the dark on this one, so the simple solution goes like this: stay away from trading the GBP until a few days after the vote. My reasoning for this suggestion is simple. The public does not have anywhere near the buying power to impact the order flow in the global currency markets, but the biggest banks, hedge funds and institutions do. When they step in and decide whether to buy or sell the GBP it will create some major imbalances in the Supply and Demand equation and once this shows itself on a price chart, then and only then will I look to buy and sell based on that alone. Don’t try and be a hero on this one. Better to stay on the side-lines until the market decides to show its hand. After all, who am I to second guess the biggest institutions in the world? Only today I noticed at the time of writing this article that the Bank of England itself warned investors and the general public that the impact of the vote is a completely unknown quantity. The signs are clear as they can be – sit back watch the action unfold and then decide how to play the market after the results have come in.
In my next article we will be able to do a post analysis on the outcomes of this truly historic event. Remember too, that even if you live outside of the UK, other currencies will be impacted by the volatility ahead. The USD itself is going to feel it either way because if the GBP goes up, then the USD will have to go down and vice-versa. Any currency paired against the Pound is going to be an offset and so, will be hit one way or another. Play it safe and be smart. There will be opportunity ahead I assure you. Just make sure you don’t gamble your trading account with guesswork the day after the big vote. Patience always pays in the end.
Safe trading and be well,
Sam Evans – firstname.lastname@example.org