Are Brexit Fears Driving a GBP Sell-Off?

 
 
 
The current GBP to EUR exchange rate begins the week trading at 1.25 and looks set to fall further to 1.2279.

This is likely to prove a tough obstacle to break through, mainly because Forex traders tend to “cluster buy” orders in the vicinity of a pivot point such as this, with the expectation that the pair could flatten or even bounce if it is reached. However, should the rate fall below this monthly pivot point, the gate will be opened toward a further down-trend, possibly touching 1.2000 – a psychologically significant “round number” support level.

 

It is difficult to explain the pound’s current sell-off without recourse to the influence on trading sentiments of the upcoming EU referendum. Macro-data has not been especially gloomy recently, so it seems reasonable to speculate that the stubbornly deadlocked results of referendum polls is influencing Forex trading strategies in the direction of a GBP sell-off. Individuals and businesses may be cutting exposure to sterling as the 23rd June referendum draws closer.

 

If the result is “Bremain” rather than “Brexit,” historical precedents suggest that the pound could be in for a strong rally, as was seen after last year’s General Election and the Scottish Independence referendum.

 

However, the pro-EU vote could be undermined by the tax scandal currently engulfing Prime Minister David Cameron after leaked documents revealed that he had secretly held large sums of money in an offshore Panamanian account.

 

There is no evidence as yet that markets have started pricing on the basis of a tilt toward Brexit, but if future polls indicate that the scandal has hurt Team Bremian, it could trigger another decline in the GBP/USD pair.

 

Currently, the pound has lost about 8.0 per cent of its value against the USD, which a study by the Italian Bank UniCredit lays squarely at the door of fears that the UK will leave the EU.