UK economic impact
The impact upon the UK is a highly disputed issue, yet it seems likely that the UK economy will initially suffer, with a number of firms speculating that they would either move their operations or personnel in the case of a Brexit. HSBC's recent declaration that 1000 investment bankers would have to move to Paris is one such example of this.
From an export sense, much would be dependent upon the ability to agree similar free trade deals with the UK’s trade partners. Considering that exports to the UK made up over 2.5% of GDP in 2014, it is clear that the eurozone derives significant economic benefits from trade with the UK. Whether that is enough to force through free trade agreements in the fact of a highly controversial Brexit is another matter.
With a number of the most dominant EU nations exhibiting a trade surplus with the UK, it is arguably just as beneficial for many EU nations to obtain a free-trade deal in the event of a Brexit. In fact, the eurozone as a whole exhibited a trade surplus close to 1% in 2014.
Boris Johnson’s shift into the ‘out’ campaign provided us with a perfect proxy for what will happen within financial markets should a Brexit become more likely. The pound is specifically the primary casualty, as highlighted by the circa 2% fall in the early hours of trading this week.
The rally in the FTSE 100 also highlighted how detached the index can be from the UK economy, with many of the 100 firms on the index being either internationally based or focused. Interestingly, the more UK focused FTSE 250 also saw a higher gap in response to the heightened chance of a Brexit. As such, it makes sense to focus upon the pound as a Brexit play.
Looking at GBP/USD on the monthly chart, we have seen a major deterioration in the past four months, bringing the pair back into the first of two a major support zones (shaded). There is little doubt that any increased chance of a Brexit, as reflected by opinion polls and media coverage would lead to a continuation of this sell-off.
Given that price is currently at the bottom end of this support zone, a break through $1.4063 could lead to another sharp devaluation to the second zone at $1.3682-$1.3504. However, much will be dependent upon how the debate progresses. The past 29 years have seen just a few fleeting moments of price action below these levels, with GBP/USD always ending back up above current price by month-end.
Considering that by current estimates, the UK is over 60% likely to remain in the EU, there is a good chance that we could be getting a little carried away with any further devaluation. As such, any flush below current levels, outside of the lower Bollinger band and into the $1.3682-$1.3504 zone could be a great area for a rebound in this pair. Especially if this is driven by hype and hysteria rather than any actual shift in the likeliness of a Brexit.
EUR/GBP has also reflected this recent deterioration in the value of sterling, with a circa 11% rally since early December. Interestingly, we have seen a bullish break through the £0.7764 resistance level which underpinned price throughout the 2000-2015 period. With price now back above this key level and above the middle Bollinger band, there seems to be further room for gains.
However, bear in mind that we have not seen price move through the upper Bollinger band for almost seven years. As such, any hysteria fueled rally into the upper band could also mark a sensible area for this pair to look unreasonably overbought. The key is whether any such move was accompanied by an actual heightened chance of a Brexit, or merely a continuation of this theme where people are simply selling sterling due to heightened media coverage.