Brexit Threat Put to Bed Early, GBP/USD Set to Move Higher for 2016

Once the market settles after the referendum, the bias should remain on the upside for a while longer.

With the June 23 referendum that will decide whether the UK remains a member of the European Union rapidly approaching, let’s take a look at the time line of events, starting with Prime Minister David Cameron’s historic announcement.

On February 20, 2016, Prime Minister David Cameron announced that the UK will vote on whether to remain in the EU. The prime minister made his historic announcement in Downing Street after briefing the cabinet. He said he would be campaigning to remain in a reformed EU – and described the vote as one of the biggest decisions “in our lifetimes”.

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Ministers immediately divided up into the leave and remain camps as the campaigns got under way in earnest. The impact on the British pound was immediate with the GBP/USD falling from its February 19 close at 1.4395 to 1.3835, -0.0560 or -3.89% by February 29.

This as it turned out was the Brexit bottom for the year. At that time, articles said that the Brexit was highly unlikely to occur because PM David Cameron had the support of half the companies in the FTSE 100. So we can say that job security was a major issue swaying the vote to remain.

By not falling below the February 29 bottom for nearly four months, we can say using hindsight that this bottom was the proverbial line in the sand and that a Brexit had been priced into the British pound. In other words, all the recent talk and warnings about an economic disaster had been priced in with it.

After reaching its low at 1.3835 on February 29, short-covering and aggressive speculative buying drove the forex pair to 1.4436 on March 11. This price was slightly above the top the day before Cameron made the referendum announcement.

From the top at 1.4436, the GBP/USD proceeded to zigzag several times, producing a range of 1.4513 to 1.4004 in the process. At the time of the April 6 bottom, the UK government announced that it would spend nearly 10 million pounds of taxpayers’ money on a leaflet to be sent to every UK home warning about the dangers of a Brexit. The pamphlet warned an EU exit would put jobs at risk and increase the price of household goods.

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This event triggered a huge rally from April 6 to May 3 with the GBP/USD gaining 0.0765 or +5.46% in only 19 trading sessions. The pound actually turned higher for the year on this rally, serving as a sign that investors spooked by the fear of Brexit started to see the chances of Britain actually leaving the EU as getting less and less likely, making the bearish outlook on the pound less prominent.

After this move produced a top, bookies and pollsters dictated the direction of the GBP/USD, much to the liking of the Forex trading firms that gladly took every side of every small speculator trade, knowing that the odds of success were squarely on their side. The forex firms held the market in a range while the polls did the rest of the work, producing a choppy, two-sided trade that was too much for the small speculators to handle. All this was likely taking place while big money professionals were either on the sidelines or waiting near the bottom to initiate new long positions. One headline even read that the European hedge funds were saying Brexit would not take place.

The fun and games came to a screeching halt on Thursday June 16 with the tragic death of pro-European Union (EU) politician Jo Cox that shocked the U.K. and likely swayed public opinion towards the safety of a unified economic bloc. The news likely changed the psychology of the campaign.

The market appears to believe this with the GBP/USD up 0.0660 or 4.71% from its June 16 low at 1.4012 in Monday’s early trade.

The daily chart indicates that it is off to the races for bullish traders. Not only are fresh buyers coming into the market, but short-sellers appear to be covering their positions aggressively. A flame has been lit in the GBP/USD. The forex pair is also trading on the strong side of the 50% level of the nearly four-month trading range at 1.4302. This is usually a strong sign that a market has turned the corner.

Furthermore, the price action and the upside momentum indicates that buyers are going after last year’s close at 1.4733 and a pair of tops at 1.4739 and 1.4769. Although there is still the possibility of volatility leading up to the Brexit referendum on June 23, any selling pressure is likely going to be profit-taking after the tremendous short-term rally.

Once the market settles after the referendum, the bias should remain on the upside for a while longer, but then the rally will be capped as investors return to more traditional fundamentals while trying to determine the timing of the next rate hike by the Bank of England.



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