On the 23rd of June the United Kingdom will hold a referendum to decide whether it should remain in the European Union or whether it should leave. A potential leaving of the European Union by the UK has been dubbed ‘Brexit’ and the polls are currently suggesting that it can go either way.
This uncertainty has weighed heavily on the British pound since the beginning of the year and is poised to spark strong volatility in Britain’s currency in the wake of the referendum, regardless of the outcome. This in turn creates the opportunity to generate strong trading profits in the currency market.
In this post you will be introduced to the main currencies to watch as a forex trader, once the referendum results have been announced.
The Swiss Franc
Since the beginning of the year investors and currency traders have moved their pounds into safer currencies, such as the Swiss franc, as suggested by British bank HSBC, in anticipation of a possible steep decline in value of the pound, should the British public vote ‘no’ to remaining in the EU. HSBC’s currency market analysts make the argument that the Swiss franc will strengthen should the UK public vote ‘yes’ to the UK leaving the EU, as more funds from the UK will flow into the safe haven currency. However, should British voters decide to stay in the EU, the Swiss franc will not be negatively affected by that outcome. Hence, a suggested hedge against a potential steep decline in the British pound would be to buy Swiss francs. Having said that, as a forex trader you could also put this trade on as a risk trade, with a beneficial risk-return ratio, as the downside risk is rather limited and the upside potential could be very lucrative.
The US dollar
The US dollar is another safe haven favorite to keep an eye on in the wake of the referendum. In times of market uncertainty investors often purchase US Treasury bonds. Hence, funds flow into the US dollar, strengthening the currency. Should the referendum actually end up resulting in Britain leaving the EU, the pound would drop substantially in value against the US dollar, while the dollar would most likely see a boost, also against other currencies, such as the euro.
While the market has not really priced in the Brexit risk for the euro yet, the euro is another currency that will see volatile price movements in the wake of the referendum. Britain’s departure from the European Union would weaken the euro, as the UK is a primary contributor of funds to the EU and a key trading partner for many EU members. You can trade the euro and all other major currencies via ETX Capital’s forex trading platform to capitalize on the post-Brexit referendum currency market volatility.
Another currency to watch closely, as we are only a few days away from the Brexit referendum, is bitcoin. Bitcoin started the year in the low USD 400s and is now trading above USD 700 per bitcoin. There has been a huge jump in price in the last week, as the price of bitcoin rallied by 20% just ahead of the Brexit referendum, which suggests that investors and currency traders are moving funds into bitcoin and using it as an alternative store of value ahead of a potential collapse of the sterling. A similar price boost in bitcoin was visible when Greece almost had to leave the EU. A Brexit would very likely give bitcoin a further boost, especially against the British pound.
Cover Image via Flickr