With the UK’s EU referendum looming ever closer, it seems you can hardly turn on a television or glance at a newspaper at the moment without being bombarded by politicians and economists telling you why a vote to ‘remain’ or a vote to ‘leave’ is the ‘right thing to do’.
It’s safe to say that the one thing all commentators agree upon is the sizeable uncertainty surrounding ‘Brexit’ and the major effects on the currency markets, with Pound Sterling understandably being at the epicentre of the currency storm. You need look no further than the impact felt when Boris Johnson decided to throw his hat into the ‘Leave’ camp for proof of this. In the aftermath of his shock announcement and with ‘Brexit’ becoming more of a reality,
Sterling suffered its biggest one day fall against the US Dollar since 2010 and the Pound was as weak as it had been since April 2014 against a basket of currencies. The Bank of England sounded its clearest warning to date regarding the ‘significant risks’ to the MPC’s economic forecasts posed by the referendum. The BOE went on to state that: "A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy."
To find out what impact the outcome of the referendum will have on foreign exchange markets, we spoke to Brett Thomas, a foreign exchange dealer at OSTCFX.
What to expect if we vote to ‘Remain’ in the EU
Mr Thomas said: "Should the UK vote to remain in the EU it is widely expected that Sterling will rally in the FX markets. The extent to which Sterling strengthens will in part depend on how close the polls are in the run up to the vote. The most recent YouGov poll has the ‘Remain’ camp ahead by just 2points.
"Should that gap fail to increase or indeed narrow further it will naturally generate more uncertainty as the deadline looms and as such further weaken Sterling. In this scenario we could expect a large correction and aggressive Sterling rally.
"Conversely, and seemingly unlikely at the moment, should the polls start to show a clear lead for the ‘Remain’ camp we would expect to see Sterling making gains ahead of the vote and as such any post-result rally would be more subdued."
What to expect if we vote to 'Leave' the EU
Brett explained: "In the event of a vote to ‘Leave’ there is a general consensus that Sterling would sell-off. However this would be an unprecedented event and the extent of any sell-off would be an unknown quantity; as such the predictions from banks and financial institutions vary wildly.
"One extreme shows Goldman Sachs warning that a ‘Brexit’ vote could slash Sterling by 20%. Credit Suisse also paint a bleak picture predicting Sterling to trade as low as 1.2050 and 1.2000 versus the Euro and US Dollar respectively. At the other end of the spectrum Bank of America believe FX markets are more prepared for the EU referendum, unlike the Scottish equivalent, and therefore a large part of the premium will already be built in.
"Ultimately a vote to ‘Leave’ would be negative for importers and buyers of foreign currencies, but on the flip side it could prove favourable for UK exporters as our goods and services will become relatively cheaper for overseas buyers."
Managing foreign exchange risk
Mr Thomas added: "As with most high profile and high risk events such as the EU referendum, the outcome will prove good for some and unfortunately not so good for others. In the run up to the referendum and in the immediate aftermath there could be opportunities for both exporters and importers, and for buyers and sellers of Sterling.
"The key to capitalising upon these opportunities, or to limit any potential losses, will be down to effective FX risk management. Knowing exactly how your business or personal currency requirements are going to be impacted by the differing outcomes of the vote is vital to using the correct FX strategy to limit currency exposure.
"This is exactly the situation where the use of a good FX broker can be invaluable. At OSTC FX we will be working as close as ever alongside our clients to enable them to navigate their way through this particularly turbulent period and ensure they are best positioned to succeed whatever the result."