Should UK choose ‘Bremain’, 0.7350 for EURGBP?
This chart is my casual estimation of EURGBP should UK choose to remain at the 23 June 2016 EU Referendum. Many moving parts affect the exchange rate between two currencies; while EUR and GBP might be dominated by the coming referendum, there are other forces at play concurrently.
So this is a game to me than an actual trading plan that I would put money on. Besides there really has to be a ‘Bremain’ vote for the outcome here to work out.
- Apart from some day-day fluctuations, it is clear that many currencies are switching between risk-on, risk-off mode as dictated by the tone of Fed communication. High level of correlation is a hint that these currencies do not have strong drivers that propel their own direction. On the other hand it was evidently clear that GBP was occupied by something else most probably the EU Referendum. This was covered in depth in ‘My take on currency price action year to date‘ posted on 27 May.
- An overlay of European majors EUR, CHF, SEK and NOK and GBP tells the same story – trading in a tight band except GBP.
- Should the referendum end in a remain vote, it is likely for GBP to strengthen and concurrently to revert to ‘centre’ with the rest of the European majors. This week and last, we saw GBP weaken whenever poll results in favour of exit are published.
- At the moment, EUR is around 9 percent stronger than the GBP on a USD basis. Should GBP close this entire gap, EURGBP will move to 72.00 (down by 9%). Note numbers are rounded – no need to deal with the decimals because these are all casual observations.
- However we should also consider that the other currencies display a ~2% wiggle day to day. I take this 2% as day to day noise.
- Shave this noise off the 9% premium that EUR enjoys means GBP can close 7% to around 0.735.
- There is one convenient fact: EURGBP started trading on 04 January 2016 at 0.7372. If GBP’s entire movement YTD was truly due to the coming referendum, take away the referendum effect returns EURGBP to the starting point.