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Brexit debate drives GBPUSD to 7-year low

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BREXIT scares the markets

Published 10. 03. 2016

image1The ghost named “Brexit” is scaring or perhaps terrifying the markets, as far as we can ascertain from watching the GBP’s trend over recent weeks. Despite this, most analysts are predicting a mere 25% chance that Great Britain will actually exit the European Union.

The generous agreement made on 17th- 18th February, between the European Union and Prime Minister David Cameron, seemed to have left Cameron at ease to announce the referendum on 23rd June without hesitation.

However, a “cold shower” was quickly incumbent on him; Boris Johnson, the Mayor of London, quickly stood up for the “LEAVE” and split the Tories. That questionable move has caused further selling of the Pound and made Cameron’s road more impassable.

Any attempt to quantify the effects of an eventual Brexit is arguably difficult. Several studies on the matter have estimated the potential shrinkage of British GDP (Gross Domestic Product), at anything from 1-2% in the short term, as a result of an inevitable loss of trust and the decline in foreign investments. Potential negative effects on the property market cannot be overlooked. A Brexit could be problematic, especially in London, where the property market accomplished a truly bullish rally up to 50% between 2012 and 2015, which caused the risk of a new market bubble. Right after Boris Johnson aired his standpoint , the exchange rate between Her Majesty’s currency and the US Dollar tumbled down under 1.40, until reaching 1.38, for the first time since 2009. Sterling also suffered against the Euro, as the EUR/GBP ratio almost touched 0.80, which is just 15% more than the lows reached last July (0.694).

What are the prospects for the upcoming months? We can unquestionably expect more uncertainty and volatility. If the markets really consider the Brexit as a likely scenario, there could be further new falls in the Pound, with an eventual attack to the support area around 1.35 on pound/dollar (where lows have been situated for the last 25 years),

image2then a pursuance of the actual bearish trend. Meanwhile the EUR/GBP ratio might keep on rising over 0.80, but a more accurate target will become visible after future decisions made by Draghi about Quantitative Easing. On the other hand, should the clouds above Big Ben be swept away, the pound might easily get back over 1.45 against the green banknote and recover a EUR/GBP ratio between 0.72 and 0.76 as seen in recent months.

Carlo Alberto De Casa

Chief Analyst
Carlo Alberto De Casa is Chief Analyst for the derivatives broker ActivTrades London. He worked for Bloomberg in the City of London before joining in 2011 the Forex Broker ActivTrades,…

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The thoughts and opinions expressed here are solely those of the writer and do not necessarily reflect the view of ActivTrades Plc. This commentary is for information purposes only and should not be considered investment advice. Any forecasts given are not a reliable indicator of future performance and the decision to act on any ideas and suggestions presented is at the sole discretion of the reader.