Brexit implications

Will the realisation of a possible "Brexit" lead to weakening of the GBP and EUR?

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The looming referendum on whether the U.K. will remain part of the European Union (EU) has asserted itself as the prevalent market theme at present.

A decision to leave the EU would in essence create more sovereignty for the U.K. with arguably “less” bureaucracy, however, not staying part of the broader union would certainly see the benefits thereof diminished, in the uncertainty of renegotiation. The list of matters relating would include investment & trade, employment, foreign affairs and security to name but a few.

Should the referendum result in an exit from the EU being favoured, the U.K. government will need to inform the European council of its intention. A withdrawal agreement would them be negotiated and while the negotiations are underway the U.K. would remain a member of the EU. These negotiations if not completed within two years will see the withdrawal forced into place (failing a vote to extend negotiation timeline).

The Financial Times poll of polls as of the 15 June 2016 suggests that 44% of votes are in favour of the U.K. remaining a part of the EU and 47% of votes are in favour of leaving the EU, while 9% are undecided.

It should be noted that as the referendum vote nears, polls have moved from broadly favouring the “remain” vote towards neutrality and in turn uncertainty. Uncertainty will always breed increased market volatility pre and post the scheduled event. If we trust the polls then it would appear that the swing vote lays within the hands of the undecided at present.

The global IG analyst team consensus in majority is of a vote to remain.

The IG EU referendum binary (as of 15 June 2016), which balances market polls, sentiment and client positioning, places a higher degree of certainty with the “remain” camp at 63%, with the leave camp currently at a 33% probability.

The currency view

It appears that the base case scenario among economists, analysts and big business alike is that the “Brexit” will be averted (although conviction thereof is waning as we draw closer to the event).

This would therefore assume that the greater shock to markets would be the actual realisation of a U.K. exit vote materialising. In this scenario, selling the GBP or EUR to buy safe haven currencies such as the USD or JPY might be expected to yield favourable short term results (also referred to as “shorting” GBP/USD, GBP/JPY, EUR/JPY or EUR/USD). This implies an expected weakening of the GBP and/or EUR in its uncertain environment as the USD or JPY attract funds through their relative safety appeal.

Inversely, should a “remain” vote be secured in the referendum, buying the GBP or EUR and against the USD or JPY might be the favourable play as the EUR and GBP shrug off pre referendum jitters to find renewed short term appeal through the safety of continuity. The upside (should it occur) however is expected to be limited as it is perceived as the probable base case scenario mentioned above.

Options are volatility products and at current levels most appear to be elevated in terms of pricing, so this might be a period where traders consider starting to sell options as opposed to buying them. FX options with exposure to the GBP or Euro related index options might be a favoured.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.