Brexit or Bremain: What is the Trading Strategy?
Tomorrow, June 23, 2016, the British people will vote to determine the fate of British membership in the European Union. Until now, the results of the poll show intense competition among voters who want Britain to leave the European Union ( Brexit ) and a stronghold that wants Britain to remain in EU membership. The second choice is later called “Bremain”, an acronym for “British Remains”.
Actually for forex traders, what is more important is what trading strategies can be used after this referendum. For this reason, this time we will review some strategies that you can consider.
SCENARIO 1: IF BREXIT HAPPENS
Will GBP be hit if the UK leaves the European Union?
There are several important points about this:
- The Bank of England (BoE) may be dovish , and this will put pressure on GBP
- It is likely that there will be steps to weaken the GBP with the aim of increasing exports to protect the British economy
- GBP / USD and GBP / JPY will likely be the most attractive pair
If Brexit happens, you have to be careful about choosing the currency pair that you are going to trade. Even to transact a pair involving GBP, you must evaluate the strengths and weaknesses of each currency.
Here are some pair scenarios that might provide a pretty good opportunity if Brexit happens.
GBP / JPY: Bearish potential
For most traders, GBP is considered a riskier currency while JPY is a safe-haven. So the possibility of a reaction that will be experienced by GBP if there is a Brexit is quite clear: risk-off sentiment is expected to rise so that the JPY tends to strengthen against GBP.
The yen may also add pressure on GBP / JPY because the currency has been acting as a safe-haven. Market uncertainty is likely to make market participants “run” to the yen.
Thus, if Brexit occurs, GBP / JPY will likely move down.
GBP / USD: Bearish potential
The pound will be affected for the same reasons as above. Meanwhile, the USD has rallied because there is potential for the Fed to raise interest rates at least twice this year, with the possibility of the first increase will be made in July.
If Brexit happens, GBP / USD is likely to move down.
SCENARIO 2: IF UK STAYS IN THE EUROPEAN UNION
There are also some important points related to this:
- If the “Bremain” camp wins, then the automatic ” Brexit ” uncertainty will disappear.
- In the months before Brexit, the pound was pressured, despite strengthening in the final moments after Jo Cox was killed, a pro-EU member of the British parliament.
- There is a chance of recovering pounds. Similar results are seen after the Scottish referendum.
- Besides GBP / USD, GBP / AUD is also expected to be quite attractive.
For GBP / USD , the potential for a move that is likely to be bullish / up, which is the opposite of the Brexit scenario. However, remember that the Federal Reserve has the opportunity to raise interest rates in July, so there is a possibility that a bullish GBP / USD will not be too long.
While for GBP / AUD, it is expected to be potentially bullish / up. This pair is the most traded in the market when the Brexit issue is spreading. The loss of uncertainty about Brexit has the potential to benefit the pound, moreover the AUD has proven to be the best currency for sale with GBP. With Australia’s recent interest rate cut by the Reserve Bank of Australia, the AUD has proved bearish in at least the past six weeks.
Moreover, Australia is China’s trading partner that is experiencing an economic slowdown. This, for the medium term, is likely to weigh on the Aussie.
Nevertheless, the market remains the determinant of the effect of the referendum on price movements. The market may not agree with our analysis. In other words, stay prepared for all possibilities. Use capital management and risk management properly and adjust to your capital strength.