Trading on Monday and early Tuesday has sent a clear indication that financial institutions are beginning to re-position themselves for a likely ‘remain’ outcome via the Brexit vote. Weekend polls and surveys published today show that there has been a surge within the public wanting to stay within the European Union.
It appears that the killing of Jo Clark last week has hurt the ‘leave’ faction and galvanized the previously undecided. It is unlikely that with less than a day and a half before the referendum that the pendulum will be able to shift back to ‘leave’ faction. Speculative investors have sprung into action and the GBP has gained considerable value.
The positive move for Sterling actually began to happen on Thursday and Friday of last week and anyone who entered the GBP/USD with a buy position likely finds a tidy profit sitting in their accounts at this juncture. Traders have shown an inclination to take on riskier positions and because of this global Indices and corporate shares have put in gains.
The EUR has also gained in early trading this week. It stands to reason that if the U.K. decides to stay within the E.U. that the EUR will have less uncertainty surrounding its future and this should give the Single Currency some needed stability. The question is what will happen the day after the Brexit vote?
Even if the U.K. does remain in the E.U., FX trading is certain to become quite interesting short-term based on the time honoured tradition of ‘buying the rumour and selling the fact’. Simply put the GBP and EUR have put in gains already based on the belief that the U.K. will vote to continue its full relationship with Europe and while traders will be tempted to latch onto positive momentum short-term as the GBP and EUR look for their historical long-term values against the USD, Friday’s trading could be quite a whipsaw experience.
If traders are waiting for the results from the election in order to take advantage of ‘positive sentiment’ with quick trades than they will likely miss the boat, because ‘smart money’ is already in the GBP trading environment and quite possibly waiting for those with less deep pockets to step into the fray and take advantage of the short-term participants as the ‘smart money’ sells their positions off in order to take profits.
The GBP and EUR both look like good long-term values if the Brexit vote gets an outcome – of remain. However, short-term after the referendum expect to see the broad markets trade in fashion that is similar to critical interest rate announcements, when many have already positioned themselves for a ‘known’ Central Bank hike. In other words if the Brexit produces a remain vote, in the short term the currency might see a momentary pop and spike, but the GBP will also likely experience a pull back as profits are taken from pre-existing positions that were put on prior to the vote.
Sterling and the EUR do have the extra bonus of having a Federal Reserve in the United States which is seemingly paralyzed at this moment by economic data that is not good enough for the Fed to do anything but remain cautiously optimistic. A lot of value has already been put into the USD because the Fed has talked about the possibility of interest rate hikes for nearly a year.
It might be time for the USD to start faltering in the wake of a Federal Reserve that has to admit that it is finding the landscape of the American economy challenging once again. Let’s not forget that one method the Fed has used before to help improve the American economy is to keep the USD at lower values against the GBP, EUR and other major currencies in order to improve exports from the States.
Federal Reserve Chairwoman Janet Yellen will be testifying in Washington D.C. Tuesday and Wednesday before Congress regarding monetary policy. She will certainly speak about concerns regarding the potential of a Brexit, but she will also face tough political questions about the state of the American economy. Certain lawmakers will look to make points that the current U.S. administration and its selected Federal Reserve leaders have failed to improve the problems of the middle class.
The GBP finds itself at an extremely dynamic crossroad. It has gained a good amount of value the past few days of trading before the Brexit vote takes place and it stands to reason that it has additional value that it can find in the coming months.
However, short-term traders need to be aware that an outcome of remaining within the E.U. has in many respects already been acted upon. In order to profit from a notion that the GBP will add more value, market participants may find that long-term buy positions are the better way to go if they choose to enter the fray only after the official vote result is announced by the U.K. government.