With the Brexit vote only a few days away, I’ve been hedging my equity positions. The only big directional position I’m planning to hold is GBP/EUR where I feel that there is upside to take advantage of whether or not Brexit happens.  

Please note that I don’t care about the technicals and am just focusing on the fundamental story here.  Also, there are other factors and economic data that could affect this currency pair.  I’m ready to hold my position for six months to one year if required.  Please do your own research before executing this trade.

GBP/EUR has declined 9% over the last 6 months to 1.2555

It’s very difficult to attribute the decline to any factor, but most market participants believe that Brexit fears may have played a part in the decline of the currency.  

GBP-EUR

Scenario 1: Brexit happens

In case of Brexit, both GBP and EUR could fall further against USD and in a knee-jerk reaction GBP might drop more than EUR, which will mean that initially GBP/EUR might drop. I do believe that in this scenario, the EU has more to lose than the UK – one less big brother to help the weak economies in the EU, and pressure from other countries, especially France, for referendum to leave the EU.  This could result in the weakening or breakdown of the EU, and of course EUR could decline significantly.  Due to these factors, I hope that GBP/EUR will appreciate in the short to medium term after the initial decline.

Scenario 2: We stay in the EU

If we stay in the EU, there shouldn’t be much impact on the currency pair, but it may be that GBP has a relief rally and recovers some of the decline it has had over the last 6 months due to the Brexit fears.  So there is an upside potential with a limited downside risk.

In summary, my thesis is that GBP/EUR can appreciate irrespective of the outcome of the EU referendum.  In case it doesn’t appreciate, the downside seems limited.  However, embrace yourself for some volatility.  

If you want to keep a watch on breaking news on Brexit, currency pairs, etc, you can do that on CityFALCON.

 




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