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Brexit Deal Could Bring a Bid to GBP

Brexit Deal Could Bring a Bid to GBP

2016-02-19 23:51:00
James Stanley, Currency Strategist
Brexit Deal Could Bring a Bid to GBPBrexit Deal Could Bring a Bid to GBP

Fundamental Forecast for British Pound: Bullish

  • Retail short positions jumped in GBP/USD ahead of the EU Summit in anticipation of a British exit from the EU. Reports are circulating that a deal has been reached between Mr. Cameron and EU politicians, and now Mr. Cameron will take that more favorable deal to British voters in a referendum to be held later in the year (could be as early as June).
  • This increased short positioning in GBP going into the summit could lead to sharp moves higher on cover after reports of a deal being struck without prolonged negotiations.
  • To stay up with positioning in GBP, check out and follow our Speculative Sentiment Index.

Dominating the headlines for the foreseeable future in the UK will be the prospect of a ‘Brexit,’ or a British exit from the European Union. This has been over three years in the making. In 2013, the Prime Minster of the UK, Mr. David Cameron, pledged that should conservatives take a parliamentary majority in the 2015 elections, the UK government would negotiate more favorable terms for continued EU-membership before holding a referendum in which residents of the UK could vote on the matter. Conservatives took a majority in those elections and Mr. Cameron reiterated his pledge to hold an ‘in-out’ referendum before the end of 2017, and here we are.

Mr. Cameron and the British government are in the process of trying to negotiate those more favorable terms right now. The UK government wants concessions for continued membership in the EU and it makes sense, given the unique geographic disposition and economic influence for/of the United Kingdom; but member states of the European Union are balking at the idea of giving special treatment to any individual member, arguing that it negates the veracity of the union to allow for special treatment to any individual nation.

Once those more favorable terms are agreed upon (or even if they’re not), a referendum will be held in which the British citizens get to vote on the matter and this is likely where the major volatility will emanate from. For right now we’re merely discerning probabilities of continued membership based upon the negotiations taking place between the UK and European governments.

There are numerous issues at bay. Key of which is the topic of migration, which is somewhat of a sore spot in Europe right now. The UK has 3 million EU nationals in-country with roughly 2/3rds employed, while having only 1.3 million expats living in the EU. While this deviation of approximately 1.7 million people might sound small when compared to American or Chinese populations, we have to keep in mind that this constitutes approximately 2.65% of the UK population.

This topic is being addressed in the negotiations through an extension of in-work benefits to European migrants, referred to as the ‘emergency brake.’ Mr. Cameron wants a four-year ban (which isn’t even really a full ban, as benefits would be incrementally earned based on taxes paid), and much of Europe considers this discrimination against European nationals. Given the current migrant crisis raging throughout Europe, threatening the very same Schengen agreement that provides the glue of the union, thinking this through on the part of the UK is probably pretty timely. Former Soviet Countries of Poland, Hungary and the Czech Republic all argue that this type of ban could be further applied to Germany and Austria, and if that happens, what is the point of having a union at all?

On the other hand, the trade ties between the UK and EU are significant and severing or ‘modifying’ this relationship could have a negative impact. Roughly 45% of exports and 53% of UK imports transact with Europe. Roughly 3.4 million British jobs are supported by this industry; and for a country with a population of 64.1 million people, again, this is significant; approximately 5.3% of the British population.

As of 4:09 PM Eastern Time on Friday afternoon, the Lithuanian president tweeted a message that a deal has been reached in which Britain will receive a 7-year emergency break. This hasn’t yet been confirmed and more details are not available at the time of writing, but this doesn’t close the matter as now Mr. Cameron has to sell this to British voters.

In the near-term, this could be GBP positive as fears of a Brexit on the back of stalled negotiations had driven the Sterling lower. Longer-term will depend on British voters. For now, we take a bullish forecast on GBP moving into next week, and will review as more information on negotiations and a potential Brexit become available.

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