Drifting from the EU: Brexit, Grexit, and How it All Affects FX – Forex Trading Strategy
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Drifting from the EU: Brexit, Grexit, and How it All Affects FX – Forex Trading Strategy
The European Union is constantly going through its paces. It started as an economic area between six countries and more countries joined in as the years passed. Its structure changed over decades to become what we now know as the EU. At the time of writing, three Balkan countries have entered the supranational entity, but the EU has been facing new challenges – moves which oppose its expansion. First, it was the Grexit in 2015 which tested the will of the Greek people to stay in the EU among tougher economic restrictions. And in June 2016, British citizens decide whether they want to stay in the EU. This key vote may have implications for the respective currencies as well, before and after the referendum.
In 2015, the Greek Prime Minister Alexis Tsipras brought the Greek people to a referendum to decide if Greece would remain in the European Union (EU). The EU had given Greece billions of Euros in soft debt to pay off the administration after Greece was hit hard by the financial crisis. In 2012, Greece received a financial haircut, where half of its debt was written off from European banks and governments, yet Greece maintained their relaxed working conditions compared to the northern European nations – and the tax revenues didn´t match government expenditures. So, for the EU it was like throwing money into a black hole and, therefore, the EU forced new measures for Greece, and the Greek prime minister brought the issue to the people’s vote. Actually, the referendum in itself was about whether Greeks would accept economic measures such as tax hikes, increase in the retirement age etc., that the EU had imposed on the Greeks in order to dispatch the next round of cash. If the Greeks voted against the measures, then it meant that Greece would be booted out of the EU. It seemed a bit harsh but there was no other option. As we now know, on 5th July 2015 the Greeks voted to stay in the EU and accept the new restraints from the EU. Now, Greece is a small nation, and its economy only accounts for around 1% of the EU, so the Euro didn´t really mind the Grexit referendum.
The situation with Brexit is another matter. Britain is a founding member and one of the four biggest economies within the EU. If the British people decide to leave the EU it might kick off a ‘domino effect’ for other EU members. We already know that the anti-EU forces in European countries are getting stronger, particularly after the mass migration wave which started in 2012-13 after the “Arab Spring”. In Germany, Netherlands, Hungary etc., the extreme right wing parties are gaining more votes from the electorate, and in France, the National Front won the last local elections. A possible Brexit will motivate these teetering countries even more and give them a strong reason to present their cause to their citizens. The polls show that the Britons who are going to vote status quo have a slight advantage but the polls are oscillating constantly. On the other hand, I´ve talked to many British people and it´s staggering how many of the people I thought would be in support of the status quo are actually in support of leaving the EU. But, I personally think that the scaremongers will hit the screens in the last few days and those who are undecided will vote to stay; they always do, and it´s those swing voters who usually make the difference.
Now, that´s up to the British, but we are forex traders and we watch these sort of events exactly for that reason, to trade forex. So, what does it mean for the trading the British Pound? What does it mean for the Euro also? You didn´t think the Euro would be affected did you? Well… it is, so we must evaluate both sides of the coin and from every possible angle in order to trade smarter and make the most of it during such events.
The Pound Before the Referendum
The Brexit referendum was announced several years ago, but the Pound didn´t feel the pressure until it got close enough to really feel the impact. When this happened at the end of 2015, it tumbled about 20 cents until February 2016. That move was caused by the fear that Brexit would occur, and London would lose its role as a world financial center (which won’t happen anyway, as the center is elsewhere). I know many think that New York is the world financial center, but half of FX is traded in London which translates to about $2.5 billion in everyday trades. Anyway, this was the case and we had some very profitable long-term forex signals during this huge downward move. Then, the polls started and everything became very chaotic. In this situation is better to stay out, because you just don´t know what the next poll will predict. For this reason, we have reduced our forex signals in the GBP pairs and have only opened sporadic short-term forex signals.
The Pound After the Referendum
If Britain votes ‘stay’, then we might see a rally in the Pound in the next few sessions after the exit poll, but I don´t think it will be a particularly large move… probably a few hundred pips. After that, we might see a stall or a retrace because the market will already be over the Brexit. The focus will be on the after-effects, like the shape of the British economy.
If the Brexit side does win, which I don´t see it happen, the Pound would suffer in the near term. There would be great uncertainties about how the UK- EU relations will be and how the UK economy will react to all of this. After all, EU is the largest trading partner of the UK. We might even see parity in EUR/GBP and USD/GBP in the following months. But, as the water clears the decline will stop and a reverse will follow, but you never know when.
The Euro after the referendum
Now, a few years ago it didn´t look like the Euro would be affected by the Brexit. After all, the UK would be out so it will take all the costs, right? Wrong. First of all, in the UK there are about 4-5 million migrants from the new eastern European EU members. What will happen with them? They will probably return to their countries or the other western EU countries. But the unemployment in the EU is already quite high and the economic situation is not that rosy either. But, the most important thing is the domino effect that could potentially spell out the doom of the European dream. If the UK leaves, everyone may follow suit. It might never happen but, the fear is a tricky devil, and the extremist parties will use this to their advantage. That would be the time to sell the Euro and ride the trend… maybe against the Japanese Yen, the US Dollar or even against the Swiss Franc. But there is no use giving into the speculation, and we will decide where these currencies are after the referendum.
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