Will the Pound fall if the UK votes for Brexit?

9 June, 2016

Rob Bastin

In the lead up to the referendum the currency markets have returned to the highest levels of volatility experienced since the recession, and with it comes increased levels of risk for those that need to buy Euros in the coming weeks or months. After plummeting over 15% at the beginning of the year, GBP/EUR found itself trading as lows of 1.2320 just 2 months ago before speculators pushed the pound up 9 cents to the ceiling of 1.3220 in late May. This Sterling strength was driven by the referendum polls that indicated as much as a 10-15% lead for the stay vote. At the same time the Euro itself was weakening due to a strengthening US Dollar as markets were pricing in a rate hike from the US this month, allowing for significant gains with one currency strong and one currency weak.

Since hitting 1.3220 the picture has developed significantly with rates dropping over 5 cents in as many trading days. Whilst a drop from 1.32 was fully expected, the pace of the turnaround could not have been foreseen with both currencies reversing their recent trends at the same time. The latest referendum polls are now suggesting a small lead for the vote to leave the EU, and in turn all the speculative buying over the last couple months is being unwound, and Sterling is being sold heavily from the previously over-inflated levels. At the same time the latest non-farm payrolls (unemployment) figure for the USA on Friday was one of the worst seen for many years, with just 38k new jobs created against expectations of 164k. This result has almost certainly removed the chance of a rate hike in the US this month with the markets now not expecting one until August. What does this mean for GBP/EUR? It means that all the Euro selling last month is also being unwound with the Euro making 2% gains against the USD and further gains against the pound on Friday afternoon. Sentiment has now reversed to a weak pound and a strong Euro again, with the technicals resuming the next downward arm of this trend. With just 2 weeks to go until the vote, it seems only another significant poll swing towards the stay camp can save GBP/EUR from heading towards 1.20 again in the lead up to the decision on the 23rd June.

Recommended reading: BBC article on Brexit and the Pound http://www.bbc.co.uk/news/business-36464502

If the UK does vote to the leave the EU on the 23rd June it is forecast for the pound to drop around 10% very quickly with potentially another 10% over the months to follow. This could increase the cost of a €250,000 property by as much as £10-£20,000 if you are to gamble over the result before buying your Euros. Therefore If you are needing to send Euro payments in the next few months, there is an increasing argument to be considering a Forward Contract sooner than later as the downward risk has significantly increased. This contract works to secure and guarantee you a rate for up to 2 years ahead, with just a 10% deposit.

The good news is that after suffering heavy losses last week, we saw a 2 cent spike earlier this week which was largely a natural correction in this downward move and provided an excellent opportunity to secure a rate at a higher level for those who wish to lock in their Euro rate and remove the risk altogether. As the week wore on however the Pound quickly gave up most of these gains. To discuss available rates in more detail please contact us at Currency Index or register for a trading facility without any cost or obligation.

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