Brexit - what should traders do?

Hello! As many of you know, on June 23 there will be a referendum on the UK exit from the EU. Why is it important? Because, in addition to the impact on the European economy, this event will cause high volatility in the Forex market and possibly lead to a powerful movement for all pairs with pound and euro.

In what direction to take the positions, and when? Probable forecasts of pound pairs movements, key levels, and trading tactics - all of it is in our today’s review.

What is Brexit?

On June 23 will there be a referendum on Britain’s exit from the European Union, which will finish long-lasting dispute about the place of the Kingdom in the EU. Possible scenarios are unofficially called Brexit (short for British exit) and Bremain (Britain remain).

In fact, Britain has never sought to become part of a European superpower, as well as did not consider it necessary to join the euro area and abide all the conditions of the Schengen Agreement. But if previously the relationship between the union members mostly went on a trade agreement, the current Union looks more like a full-fledged political union, with the core in Brussels. This means that a substantial part of the “native” British legislation is adapted to the compliance with EU standards.

Previously, the benefit of being a part of the union for the British was evident, and a long period of economic growth, until the crisis of 2008, is a confirmation of it. At this point, the utility of such close cooperation is questioned - British see a weak partner in the EU, and the data of population surveys indicate a bias in favor of British exit from the European Union structure.

The loss of an informal Britain’s status as a European financial center is at stake. In any case, the positive decision would create a significant shock for the world of business and banks located on the territory of the country. It should be borne in mind that a significant proportion of the export relies on the EU area, and in the event of an exit from the EU, the Kingdom might lose barrier-free access to the common market. On the other hand, Norway, though not part of the Union, but by special arrangement enjoys all the privileges of the single market.

Given the fact that Britain is an important economic center of Europe, exiting the EU can prevent the establishment of the transatlantic partnership. In connection with this, the UK faces a reduction in foreign investment and jobs, and thus the industry may be affected, including German.

What do brokers do

Remembering the experience of last year’s explosive growth of franc volatility when in just a few minutes the rate rose to almost 30%, brokers are taking measures to reduce risks in advance. Growing uncertainty in the market fuels the panic, which also confirms the surprisingly pessimistic players’ reaction to the information about the appointment date of the referendum on June 23.

Many brokers then suffered a great loss, Alpari UK paired with FXCM even required help from third parties. Growth was so unexpected that the margin on customers’ accounts evaporated even before it was time to close the transaction. As a result, Saxo Bank turned out to have around 100 million dollars of debt and was reprimanded by its Danish regulator.

To avoid this situation to repeat, the company is trying all sorts of ways to remind their customers about the increased trade risks. Of course, as temporary measures margin requirements will be increased in pairs with the pound and the euro, as well as CFD contracts on British shares. Keep this in mind while trading.

Brexit for traders

On the background of the forthcoming referendum, the situation for the pound does not look quite favorable (not favorable at all). February 20 was declared the exact date of the consultation and then pound for 3 trading days slipped by as much as three figures, reaching his seven-year low. Here it is necessary to understand that the market does not always truly evaluates the consequences of certain events. A similar result was observed every time when Brexit was mentioned in the news.

Most analysts agree that we will have to expect a sharp depreciation of the currency, which can result a 15-20% fall in the pound against the dollar and other major currencies. Another thing is that the level of support at 1.35 is very strong, and to break it, you need to be sure of the negative impact of the decision. But even such a decline may be only short-term phenomenon while the recovery process can take much longer. Also, a possible scenario is if the currency rises, if Britain decides to stay in the EU. In this case, we pay attention to the next important resistance level at 1.50, which is where the price is likely to move.

Particular attention should be paid to the EURGBP pair. In the event that an agreement is kept current, the value of the currency will most likely slightly rise. The closest target level in this case - 0.76. In the case of the decision of quitting the EU reaction will be much stronger, and thus, you should expect the rate growth to the nearest strong resistance at 0.90. Thus, in any case, risks are heavily biased towards the weaker pound.

On the other hand, if we take into account the precarious situation of the euro, also likely the situation that we will see a sharp increase up to 0.80, after which the price will reverse towards the support at 0.72. In this case, it is best to sell at the resistance level.

Survey data is currently leaning toward the exit from the EU - 46% of the voters. 44% believe that Britain will remain part of the union, and 10% have not made a final decision. Official voting will be closed at 22:00 GMT, but the results are likely to be released in the morning.

Just in case, let me remind you that the abnormal volatility during this period is not conducive to engaging in any transactions. Therefore, if you do not want to risk, it is better to abstain from trading this day.

Take care, Michael Pivonka

ForexTraderPortal.com