The United Kingdom appears set to decide its fate within the European Union over the coming months, with voters facing a referendum that will question whether the UK should remain a member of the EU or to leave it (dubbed, ‘Brexit’). With the last referendum on the matter held in 1975, a growing chorus believe a new referendum is timely given the vast changes across the last 40 years, and with opinion polls showing almost half the population in favor of a Brexit. With the key date of June 23 approaching, we take a look at the potential fallout and how you can profit from the outcome.
Those calling for the UK to leave the EU contend that its businesses are being restricted by the sheer volume of rules, as well as the significant membership costs given the UK is amongst 10 EU members who contribute more towards the budget than they receive. As such, small businesses would have greater flexibility and control over how they manage their operations. Migration is also viewed as a key issue, with tougher controls decreasing the amount of migrants that would be able to work in the UK.
In the event of a Brexit, many analysts predict the GBP would devalue below 1.35 due to an impact on trade and the resultant effects on the UK account deficit. Further influencing factors would be the negotiation of a specific trade deal, and a reduction in business investment (10% of UK GDP) from companies that deal internationally due to heightened uncertainty over trade terms. Moody’s have also indicated the move would be largely credit negative due to a reduction in exports, subdued GDP and increasing inflation that would further delay a rise in interest rates.
Conversely, those in favor of remaining in the EU argue that trade is bolstered through the membership, where currently 52% of total trade is done with the EU and export/import tariffs would increase following a Brexit. Large companies are supportive of remaining in the EU given the flexibility it offers them in spreading resources across nations, and to retain foreign investment from investors. Failing an outcome to remain in the EU, UK employment could take a hit as jobs are moved offshore. When the referendum was first announced, the GBP lost some ground against the USD before accelerating its losses when London mayor Boris Johnson supported a Brexit. Should the UK remain in the EU, then it would be reasonable to expect an appreciation in the GBP since the uncertainty would be clarified and many of the UK’s growth opportunities retained.
Like the ‘Grexit’ crisis that roiled global markets last year, my opinion is that we are unlikely to see a ‘Brexit’, and the GBP/USD will head higher.
Disclosure: Ser Man Traders do not hold any positions in the GBP/USD currency pair