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The Build-Up to Brexit

The Build-Up to Brexit

2016-06-20 13:27:00
James Stanley, Strategist
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Talking Points:

- There is one big matter on the economic calendar this week for financial markets, and that is the upcoming Brexit vote, to be held on June 23rd with results expected the morning of June 24th.

- While the debate around the UK’s continued membership in the European Union has brought many voices to the fray, this isn’t the first time that the UK has voted on the matter, and history has overwhelmingly seen UK voters support the decision of the to stay in the ‘common market.’

- The upcoming Brexit referendum is expected to bring extreme volatility to markets. If trading anything (even non-GBP related) during this period, traders should be sure to address risk management. And if looking for trade ideas outside of GBP-pairs, the Speculative Sentiment Index or our recently-unveiled Gridsight Indicator could offer a plethora of options.

On Thursday, residents of the United Kingdom will head to the polls to vote on the continued membership of the UK in the European Union. This upcoming referendum has been dubbed ‘Brexit,’ as a catchy title that stands for a ‘British exit’ from the EU; and for the past few months this topic has dominated the headlines, seeping into global financial markets while raising the legitimate concern that we may be nearing the initial stages of the European Union beginning to split by watching its second largest economy, and second largest army succeed for independence.

But the idea of British independence is not a new one. As a matter of fact, this isn’t even the first referendum that’s been held on the matter. The UK has had an interesting relationship with the European bloc for a number of years, and the most recent events are just a new chapter in a similar story. In this article, we’re going to look at the background behind the upcoming Brexit referendum.

A Divide from the Beginning

The precursor to the European Union was the European Economic Community, or ‘EEC,’ and the UK was not a part of the ‘common market’ when it was created in 1957. The UK attempted to join in 1963 and again in 1967 and in both instances were rebuked by the former President of France, Charles de Gaulle, due to what he had claimed were a number of incompatibilities. But once de Gaulle had relinquished power, the UK attempted to join for a third time and finally became a part of the EEC on January 1st, 1973.

But near immediately, opposition rose throughout the UK. In the contested elections in the year after the UK had joined the EEC, the opposition Labour party ran on a platform built around renegotiating the terms of Britain’s continued membership in the EEC; with the pledge to hold a referendum on whether to remain in the EEC under the newly renegotiated terms. This referendum was held in 1975, and the ‘stay’ side of the vote won by a landslide with 67.2% of the vote. All but two administrative counties had a majority of ‘yes’ votes to stay in the European Union.

Again in 1983, the Labour party campaigned on a commitment to withdraw from the EEC, but was soundly defeated by the Conservative government of incumbent Margaret Thatcher. The Maastricht Treaty came into effect in 1993 and this effectively transformed the EEC into the European Union to reflect the fact that the group of nations represented Europe was much more than just an economic agreement, and was in fact a political union.

In 1994, the Referendum Party was formed to contest the 1997 elections around the prospect of holding a referendum on the UK’s continued membership in the EU; but the party failed to win a single parliamentary seat and the referendum never took place.

UKIP

But another party came to prominence shortly thereafter, as the seeds for the United Kingdom Independence Party (UKIP) had been planted in the early 90’s and began to show more visibly with a third place showing in the 2004 elections, a second place effort in the 2009 elections, and a first place finish in the 2014 European elections.

This was the first time that a party other than Labour or Conservative had taken a majority in a nationwide election in the UK since 1910. Then in 2015, UKIP took 12.6% of the vote and won their first seat in Parliament.

At this point, the political establishment in the UK began to take notice of the rising calls for British Independence, and in 2012, Prime Minister David Cameron suggested the possibility of a referendum in order to address the matter; and in 2013 he announced that a Conservative government, if elected, would hold the in-out referendum on continued membership in the EU before the end of 2017.

The Conservative party won in the 2015 elections, and shortly afterwards, the European Union Referendum Act 2015 was passed in order to lay the groundwork for another vote. Despite being against leaving the EU himself, Mr. Cameron had hoped that the vote would show the ‘full hearted support of the British people’ to the European Union. Mr. Cameron allowed for Ministers and MPs from his party to campaign in whichever direction they wanted, not binding these representatives to either side of the vote.

On February 22nd of 2016, Prime Minister David Cameron announced that the upcoming referendum on the UK’s continued membership in the European Union would be held on June 23rd, citing Article 50 of the EU’s Lisbon Treaty in the event of a majority leave vote. Article 50 of the Lisbon Treaty says that any member state can withdraw from the EU in accordance with its own constitutional requirements.

To Brexit, or to ‘Bremain’

After a date for the referendum was announced, the public debate began and factions began to rise on both sides of the matter. The campaign to leave the EU is being driven by the campaign group ‘Vote Leave,’ while the campaign to stay is known as ‘Britain Stronger in Europe,’ or informally, as ‘remain.’

Throughout the public debate, a rather contentious campaign on both sides of the matter kept the odds around the vote very much up in the air. Many public voices, including that of the Bank of England, have come out to warn of the risks should British voters decide to leave the EU. Mr. Carney warned that a vote to leave would entail ‘higher unemployment, higher inflation, slower growth and a sharp repricing in the British Pound.’ This could put the Bank of England in the very difficult position of having to choose to mold interest rate policy towards either tempering inflation (which could mean even higher unemployment and even slower growth), or re-building growth (at the risk of even heavier inflationary pressure).

This, of course, would be a non-ideal scenario and as polls have come-in showing a majority leaning towards the ‘leave’ side of the camp, risk aversion has picked up across global markets for fear that the UK may actually leave the EU. But as counter-acting polls have come-in showing a majority electing to stay, many global markets have rallied on the back of a presumed vote confirming the continued membership of the UK in the EU.

So, one of the few clear signs around the upcoming referendum is that global markets like a vote to ‘stay’ while they abhor a vote to ‘leave.’

The upcoming referendum will be held this Thursday, June 23rd with results expected the following morning, between 7-9AM in London, or 2-4AM Eastern Time.

--- Written by James Stanley, Analyst for DailyFX.com

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