At Platinum, we are fundamental traders first and encourage you to pay more attention to the fundamental section as this is where most technical traders will fail. We are constantly trying to improve our focus on the fundamentals to assist our clients on the forex markets and to give tips on BREXIT.
Going back to Margaret Thatcher times in the Prime Minister’s office in the UK, the Brits have always appeared from the outside to have had a long but strained relationship with mainland Europe.
The UK has never been comfortable with the thoughts of being managed by Brussels. The mere thought of the use of the term “the United States of Europe” is enough to make many Brits vomit. The simple fact that non-elected people can override your own parliament is not something that many Brits can stomach. Britannia rules the waves and all that jazz! It is, however, a very valid point. Bureaucrats in Brussels should not have power over how the Brits manage the UK. In the past, these bureaucrats, because they cannot change, harmonize or integrate anything in Europe have focused on issues such as:
Brussels and not the local butcher in the UK determine the percentage amount of meat in a sausage for it to be called a sausage. If a certain percentage is not meat, it cannot be called a sausage! I mean believe it or not these were parliamentary subjects.
Yes, you‘ve got it; Brussels tackles really big issues. Is it worth the Brits paying £35 million a day for this?
Now the UK does receive back subsidies and grants, the UK farmers receive money from the CAP (Common Agricultural Policy) and various research projects and infrastructural projects will also get cash back from Brussels. Last year, the UK received £5 billion back from Brussels after paying out £13 billion, therefore the UK was a net contributor to Europe by about £8 billion in 2015.
Of the 28 countries in the “Union”, 10 are net contributors. Germany first and France second, the UK third with Holland fourth. So if the Brits left, it would leave a large hole to fill from a cash perspective. The financial crash of 2008-2009 was a game changer all over the world. But the financial centres in Europe, London being at the heart, were hit hard.
The United States and the UK acted swiftly with QE (Quantitative Easing / Asset Purchasing) to keep the financial markets and banks liquid with cash to help ease pressure and to try to create a balance of stability and ease uncertainties.
The EUROZONE under the German’s direction decided to screw up everyone’s lives with AUSTERITY. It was a painful approach that deepened the issues of unemployment, DEFLATION, poverty, lack of growth, reduced social welfare, pension payments being slashed, health cuts, and cuts in education and in addition AUSTERITY halted infrastructure spending. Apart from this list, AUSTERITY was brilliant!
After 6/7 years of AUSTERITY, the EUROZONE decided that it had achieved none of the longer term goals that it had hoped to achieve, like a move in GDP / growth and inflation. It was then decided just as the United States were about to return monetary policy back to normalization that the ECB would introduce QE.
As the number of EUROZONE countries has increased the power of the UK “veto” has weakened in Europe. What was unanimity is now a qualified majority. In real terms if you do not adopt the single currency you are an outsider as most of the EUROZONE woes are EUR (€) related. There is a two-speed Europe and not using the euro effectively places you in the slow lane.
This final point was nailed home in the last UK general election by the UKIP (UK Independence Party). They asked the question – Why are we paying into something that is badly run, offers poor value for money and where we have zero real influence? The UK is no longer at the heart of Europe (I must admit I never thought that the Brits were ever anywhere near the heart, but that was the cry from the hustings!).
There is and always has been an undercurrent of Europe bashers in the UK. The recent, tragic events in Paris and Brussels, plus the shambles of managing security data, managing the financial crash, complete stagnation in trying to move forward on banking regulation, sales tax harmonization, border alignments (this one has definitely gone now in my opinion), social chapter policies, minimum wages, social security benefit swaps between countries as populations move to follow the job opportunities, foreign policy agreements, managing the ongoing GREEK debt problems…has only added to the list that the bashers continually roll out.
As the shambles kept on attracting more and more headlines, there comes a time, as I have noted so many times in these on Platinum trading floor, that the voters eventually question mainstream politics and look to the fringes for a voice that resonates more. Honestly with the last 3 for major security attacks, I think it is the time we pay attention to our own policies and improve upon them.
It is happening now with Donald Trump in the U.S. although I could not see the Brits ever tolerating such a character in UK politics the way the U.S. has so far. The politically correct U.S., where you can no longer say Happy Christmas without fear of offending someone, it can no longer hear what’s sensible or not anymore (Sorry for sitting on the fence).
Back to BREXIT:
The national interest is at stake, with voting powers changing, influence (whatever it was before) in Brussels, has now diminished and it’s all about National sovereignty. There was no chance that the Brits would ever give up the GBP (£), now that the focus will surely be on giving up sovereignty I expect the debates to be heated.
In my opinion the BREXIT debates will be focused on sovereignty. The fear of a United States of Europe taking control of all aspects of your life will be aimed at the voters. You will not be able to complain to your local MP, as he or she will be in a wine bar in Brussels.
The status quo argument to remain inside Europe, but on the better terms negotiated by UK Prime Minister David Cameron (Safeguards for the city of London, Immigrant agreements and an opt-out from tax harmonization etc.), will be argued as Europe is great for UK businesses, great for jobs and great for the financial services industry. That will be countered by the fact that Europe needs our exports so we will do just as well outside, still trading than inside wasting money that could be spent on health and education. You pick your argument and pick what box you are going to place your “X” in on June 23rd, 2016. My thoughts are that the BREXIT vote will be very close. Future uncertainty of a change versus we can be more effective on the outside retaining sovereignty is close calls to make.
However, I think that the BREXIT Market has a great chance of success following the recent refugee crisis and handling of ISIS terrorists in mainland Europe. These issues will, in my opinion, tip the scales. This is one of my major concerns right now and for those who do not trade with stop losses always protect your trade in case of these external events.
THE Platinum VIEW OF THE IMPACT OF BREXIT ON STERLING
So what happens on the 24th June and soon after should the BREXIT vote prevail? Note that Markets and big business are preparing for such an outcome.
The GBP would nose dive to 1.20-1.25 in our opinion. The crosses would nose dive as well and the EUR/GBP could be at parity in fairly short order.
The EUR/GBP is one of the most liquid trading pairs in the FX market, that pair would be our “go to” trade.
The BOE and ECB would intervene in markets probably adding liquidity through more QE. The BOE would cut rates almost immediately.
It would probably take 18 months to two years to unwind the European Union connection legally. It would be the currency markets that should be having a field day.
Trades would continue, people would still go to work, ride a bike to school, and take the train to the beach whatever… The UK is a member of the WTO and a revised Free trade agreement will be readied for the European Union.
We believe that there would be a contagion effect. It would be harder for a single currency member to leave, but we guarantee you, if the Brits do BREXIT there would be a contagion effect. Europe is ripe for fringe political parties to gather votes and influence. The inability of EUROPE to progress is astounding and with the security fears that are bound to result with the borders being re-instated again with Schengen gone, national sovereignty, which was previously not as high on the agenda will return to the mainland Europeans.
The fringe parties inside Germany (The Alternative for Germany), France (The National Front), Italy (Five Stars), Spain (Podemos), Netherlands (Party for Freedom) and Austria (Austrian Freedom Party), all want exits or have promised referendums on exits from the EUROZONE. Take it as read that GREECE and PORTUGAL are both the same as these countries that I have noted!
Initially, there would be turmoil either side of the English Channel, then a calm before the storm.
We could write a book on this subject and no doubt before June 23rd this subject and the continuing woes inside the EURO ZONE will be revisited several times again.
To learn more about the opportunities that are led by these events in the currency markets and also cross pair trading, you can book a free trading strategy session with one of our senior traders.
Hope the fundamental article helps traders understand Brexit and its impact and makes you weary as to why we are currently staying away from the almighty cable.