Unless you have been visiting long lost relatives on the dark side of the moon you will have been awash with news surrounding BREXIT.
So what is BREXIT? Simply put; it is a vote by citizens of the UK (England, Scotland, Wales & Northern Ireland), that will occur on Thursday June 23rd, as to whether the UK remains a part of the European Union.
So the UK is part of the EU? I thought they had GBP and not EUR? Correct – the UK stills uses GBP and has never adopted the EUR. The “Proud Pound”! However, whilst the UK does not use the EUR its membership of the EU is what is being voted for: Remain or Leave.
So why stay or leave?
Many UK citizens believe the UK is being held back by the EU. They say the EU imposes too many rules on business and “charges” billions of GBP a year in membership fees for hardly anything in return in return. UK citizens want the UK to take back total control of its borders and reduce the number of people coming to the UK to live and/or work. A core principle of EU membership is “free movement”, which means you don’t need to get a visa to go and live in another EU country. UK citizens also don’t like the idea of “ever closer union” and what they see as moves towards the creation of a “United States of Europe”.
On the flip side, there are many UK citizens that want to stay in the EU because they believe it benefits from membership – it makes exporting to other EU countries easier and eases the flow of immigrants, most of whom are young and keen to work, fuels economic growth and helps pay for public services. UK citizens also believe the UK’s status in the world would be damaged by leaving and that the UK is more secure as part of the 28 nation “club”, rather than going it alone.
June 23rd and beyond
Over the past few weeks global markets have been watching the whole BREXIT referendum – anyone who has been trading will have seen some significant volatility in GBPUSD and any GBP pair. More so we are seeing economies in non- EU countries being affected. The FOMC in the US are “putting on hold” any changes in US interest rates until after the vote. So what can we expect? Regardless of whether the UK leaves or remains in the EU we will see market volatility. This volatility will, naturally, be most likely in GBP & EUR. However, the result will impact USD, JPY, CAD, AUD and more. In addition we will see volatility in Global Equity Markets not just FTSE, DAX & CAC. But it will not stop there….. we will see volatility in precious metals (the good old safe haven of Gold) and Fixed income markets (interest rates) and Energy markets (Crude Oil) and Futures markets!!!
So which way will the markets move?
The consensus amongst most Economists is that an Exit vote will see GBP lower across the board. Global Equity Markets are also likely to see a drop. It is fair to say that the reverse is likely to happen if the Remain vote wins. There is talk of GBP dropping to 1.30 on an exit or rallying to 1.50 on a remain. Either way there will be volatility.
What to expect?
Most Online Brokers will be reducing leverage across a large number of their tradable instruments. This has 2 affects: it protects the client by reducing the ability to trade larger sizes and it assists the Broker in better managing its risk. If your Broker has not changed leverage be very wary! One thing your Broker has very little control over is the spreads of the prices they provide to you. If you think you will be trading on tight pricing after the vote you need to “wake up”! All liquidity providers (Banks and non-Banks) will be widening their spreads, that Brokers “consume”, to help them mitigate their own risk. As a result you will be trading on wider spreads. Not only are spreads likely to widen but the “volume” available is likely to be reduced. We have discussed in the past how a VWAP works. So if spreads are wider and there is less volume associated with the prices it is a fair assumption that when you trade on a price your VWAP fill could be at a significantly worse price.
What to do?
If you are planning on trading during the vote, and the release of results, just be aware that you may see markets “gapping” and prices widening. Due to gaps and widening of prices your Stop Loss orders are more likely to get filled so be sensible where you place them – as a sell stop is triggered based on the current market Bid and, conversely, a buy stop is triggered on the current market Offer. Therefore, if in a normal market where you are trading on a 1 pip spread with a 30 pip stop loss and normal volatility becomes a highly illiquid and volatile market with spreads of 15+ pips you can see that a stop placed 30 pips away is likely to get triggered – so be sensible!! And be mindful that markets may move in one direction significantly. Where we might normally see a 50 to 100 pip range in GBPUSD we might see 500+ or more!
As always – Safe Trading
#tradesafely #doublehit #fxzoo