Brexit blues could rumble on for GBP beyond June 23 referendum
Just the thought of the UK leaving the EU has sent shudders through the GBP crosses seeing it reach multi-year lows versus USD. However, the referendum may have opened a political can of worms, which could reverberate in the forex markets for some time after the referendum.
If there’s one thing that’s guaranteed to divide the UK’s ruling Conservative party, it’s the country’s membership of the European Union. The result of the June 23 referendum is unlikely to put the matter to rest.
At the moment various betting shops are putting the odds of the UK voting to stay in the EU at around 65%. Meanwhile, some recent opinion polls have shown the Brexit (Britain exiting the EU) campaign marginally ahead of those favouring continued EU membership. ICM, for example, put the Brexiters at 43% versus 41% for the stayers. Polls tend to vacillate according to news flow and often reflect people’s attitudes towards the government.
There’s little ‘love’ for the EU in the UK as one of the most consistently EU sceptic states. But the same could be said about the Scottish with regards the UK yet they decided to remain part of that union by 55% versus 45% who voted to leave. On June 23, it’s probable the UK will vote similarly as voters usually prefer the status quo.
A vote to leave could see the GBP/USD spike all the way down to levels of 1.2000-1.3000. Staying in the EU could see GBP/USD reclaim levels above 1.4000-1.4500, but it could be short lived.
That’s because a marginal victory for the stayers will likely see infighting in the Conservative party with the possibility of the Prime Minister’s leadership being challenged (that would most certainly happen if the Brexiters win). And the Conservatives have form when it comes to this type of behaviour. Not only that, but there will be calls for future referenda over the UK’s EU membership, just as the Scottish Nationalist Party keeps alive the prospect of another Scottish vote over remaining in the UK.
In other words, the UK could face a period of political instability fostering uncertainty, which could unnerve investors. There’s a risk that investor attitudes towards the UK could turn stubbornly negative following two referenda and then political instability.
Once participants turn negative towards a currency, they’ll look for reasons to back their views. Certainly many of the often hysterical arguments over the economic dangers of Brexit will be something for the bears to latch onto if the UK does vote to leave. Another is the UK’s large current deficit at around 4% of GDP. It’s been higher at over 5% in 2014 and has narrowed mainly due to falling oil prices. A large current account deficit means, to use the words of the BoE governor Mark Carney, that the UK relies on the “kindness of strangers”. Those capital flows from abroad, mostly in the form of Foreign Direct Investment attracted by the UK’s relative strong economy, could drain to a trickle.
If an overwhelming majority of UK voters decided to stay in the EU, it could strengthen the Prime Minister’s position within his party and end any calls for future referenda over EU membership. Under these less likely circumstances, and with other things being equal, GBP should be well supported by a strong relief rally.
In the meantime, GBP will experience persistent volatility on polls and any news item, which could influence them.
TECHNICAL ANALYSIS: GBP/USD – Poised for more volatility
At the moment GBP/USD is sitting in the middle of the Bollinger bands following, a bounce off the lower band to hit a low of 1.3836 to then it hit the upper band to make a recent high of 1.4515.
However, events are likely to take cable out of its very recent 1.4100-1.4500 range this week and also push against one of the outer Bollinger bands.
This week sees US CB consumer confidence and US Federal Reserve Chairwoman Janet Yellen speaks on Tuesday and on Thursday it’s BoE’s Mark Carney’s turn. On that day the UK reports its current account numbers, which are likely to have widened to GBP21bn-22bn from 17.5bn. On Friday the UK reports manufacturing PMI, but whatever the number, it’s likely to be trumped by US Non-Farm Payrolls, expected at over 200,000, which should be supportive for USD. And the last important data set for the week will be US ISM Manufacturing PMI due later during Friday’s US trading session.
On the technicals, GBP/USD seems to manage to garner support at just above 1.4100 and at 1.4053, 1.3958 and 1.3836 – a recent multi-year low, which is vulnerable to being breached if bearish sentiment starts to escalate towards GBP possibly due to a swell of support for the Brexit campaign.
Also, the slow stochastics are still running through a strong sell signal on the pair. On the upside, resistance can be seen at 1.4211, 1.4376 and 1.4503.
By Justin Pugsley, Markets Analyst, MahiFX