What to keep in mind if you plan to trade the EU referendum

The growing Brexit anxieties and elevated concerns over the impact of a Brexit vote on the global economy have been major themes which continue to dominate the financial markets.

Since Boris Johnson’s shocking decision to join the Brexit camp in February, Sterling volatility has intensified to extreme levels with unease mounting ahead of the anticipated vote on the 23rd of June. The pound has depreciated to unimaginable levels as uncertainty haunts investor attraction towards the currency, while other major markets continue to face punishment from the ongoing Brexit fears.

Investors must remain diligent and focused when trading the looming EU referendum vote as the market reaction will not only be focused on the Sterling but also commodities, stocks and major currencies. Although, there are many things to be kept in mind when trading the EU referendum, traders should be prepared to expect the unexpected regardless of a Brexit or “Bremain” victory.

Brexit could see the Sterling tumble & Euro exposed to losses

A direct market reaction to a “Brexit” could be a sharp depreciation of the Sterling, as fears rekindle over a potential slowdown in economic momentum in the United Kingdom. It should be kept in mind that the Bank of England has repeatedly warned of possible technical recession from a Brexit outcome, with expectations mounting over a probable future UK interest rate cut as a method of retaining stability. With a Brexit outcome seen as the underdog, a victory may likely trigger a much bigger market reaction than a “Bremain” because the impact will go beyond the UK’s borders.

It seems likely that the Eurozone may be left under immense pressure following a Brexit as fears heighten over an undesirable domino effect encouraging other countries to also leave the European Union. With the credibility of the Eurozone project hanging on a thin line, a Brexit could expose the Euro to losses consequently encouraging sellers to attack the EURUSD. While the event of the Euro crashing could be beneficial for the ECB that seeks export competitiveness to boost inflation, the heavy depreciation may signal the pending deconstruction of the Euro project.

Safe havens remain reactive

Although it is common knowledge that Gold prices are dictated by US rate rise expectations, it seems that the ongoing Brexit fears have had a similar grip on the precious metal. When expectations heighten over a potential Brexit, Gold prices remain elevated, but as optimism increases of a “Bremain” victory the metal coincidentally declines. With the Brexit concerns having an impact on the Federal Reserve’s decision to raising US rates, this trickles back down to the yellow metal. If this may be the case, then a potential Brexit could have the power to keep the Federal Reserve on hold consequently providing an opportunity for Gold prices to surge higher.

The Yen, as another safe-haven asset, would also be bolstered in the event of Brexit. The GBP, EUR, and Dollar may be set to crash, but risk aversion could boost the value of the Yen. A possible combination of Sterling weakness and Yen strength could make the GBPJPY an excellent pair to watch if the UK departs from the European Union.

Central banks on standby

Everything revolves around the growing uncertainty and it is this same uncertainty over the immeasurable impacts of a Brexit to the global economy that has kept the Federal Reserve and most other central banks on standby. If the Fed remains on standby, then the Dollar could be left vulnerable to more losses as expectations diminish over further US rate rises in 2016. A weaker Dollar may propel Gold and other commodities that are valued in Dollar even higher. These intricate relationships display how a Brexit vote affects safe-haven appetite, central bank decisions and major power currencies.

“Bremain” victory could trigger GBP relief rally

On the other hand, a “Bremain” victory could have a positive impact on the markets with the Sterling granted a sharp relief rally as fears disperse of a potential Brexit fueled recession. Investors may receive encouragement to purchase riskier assets and this could cause global stocks to appreciate while Gold prices decline. The potential combinations of USD strength from a “Bremain” win mixed with Yen weakness could make the USDJPY a potential mover if the UK remains in the European Union.

Central banks, businesses and traders, will therefore be waiting in anticipation for morning of Friday, June 24 when the national result is expected to be declared.

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Otunuga is a research analyst at FXTM