Brexit in the UK approaches in six months! [Jiro Ota]

Jiro Ota Profile

Ota Jiro. FX strategist. Began FX trading in 1979 at The First National Bank of Boston Tokyo Branch. Later worked in foreign exchange for Manufacturers Hanover Trust Bank, BHF Bank, National Westminster Bank, and ING Bank, handling corporate FX trades, then moved into retail FX, operated at GFT Tokyo as a sales force, later gaining experience as a market strategist, and is now active as an individual investor.

※This article is a reproduction and rewrite of an article from FX攻略.com, September 2018 issue. Please note that the market information in the main text may differ from current market conditions.

Brexit: The Factor That Will Shape the Pound’s Outlook

Looking back to June 23, 2016, the British people chose to leave the European Union (EU), and as a result the financial markets were significantly unsettled. Based on the Lisbon Treaty Article 50, the countdown toward the EU exit on March 29, 2019, 11:00 p.m. local time continues in the UK.

The referendum result was an unexpected 52% to 48% margin, contrary to prior forecasts, and the British people decided to exit the EU. The term “Brexit,” a blend of “Britain” and “Exit,” was born. The UK Brexit negotiations led toward the final stages, and I would like to consider how the pound might move going forward.

In conclusion, even at this stage the outlook remains highly uncertain, and three distinct scenarios must be considered. Details will be given below, but Scenario ① is a relatively smooth “orderly Brexit” with a gradual rise in the pound; Scenario ② is a disordered “hard Brexit” without an agreement, with the pound falling; Scenario ③ is a re-vote, with a substantial rise in the pound.

Looking back at past pound markets, the day after the June 23, 2016 referendum result became known, the currency market was in turmoil on June 24. The pound/dollar traded from a high of 1.5018 to a low of 1.3226 (1792 pips = 11.93%), and the close from the previous day fell from 1.4840 to 1.3660 (1180 pips = 7.95%). The pound/yen fell from a high of 160.11 to a low of 133.22 (26.89 yen = 16.79%), and the previous day’s close also dropped from 157.66 to 139.60 (18.06 yen = 11.45%). Other major currencies were similarly affected, with shocks across stock and bond markets as well. It is also believed to have influenced the October 7, 2016 “Flash Crash” in the pound/dollar as well.