{"id":93561,"date":"2016-08-02T10:35:09","date_gmt":"2016-08-02T14:35:09","guid":{"rendered":"http:\/\/countingpips.com\/?p=93561"},"modified":"2016-07-29T10:35:41","modified_gmt":"2016-07-29T14:35:41","slug":"post-brexit-effect-on-eurgbp","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/08\/post-brexit-effect-on-eurgbp\/","title":{"rendered":"Post Brexit effect on EUR\/GBP"},"content":{"rendered":"
August 2, 2016<\/div>
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By Admiral Markets<\/b><\/p>\n

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Dear Traders,<\/p>\n

As you may have seen in our previous article<\/a>, Brexit has more than a long-term impact – there are also mid term implications.<\/p>\n

This article is dedicated to looking at the financial markets after Brexit, with a focus on the euro \/ sterling (EUR\/GBP) forecast.<\/p>\n

The EUR\/GBP is among the most popular and traded Forex pairs across Europe, since it connects the two largest economies of the EU (or soon non EU?) zones.<\/p>\n

Brexit and EUR\/GBP<\/h2>\n

Deutsche Bank’s chief executive John Cryan does not favour the idea of Brexit.<\/p>

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Cryan has been a strong supporter of the EU project and admits there will be uncertainty in the EUR\/GBP forecast.<\/p>\n

Let’s not forget that we could have witnessed a strong upside reaction on the EUR\/GBP pair, after the Brexit vote.<\/p>\n

In assessing bilateral trade between various Eurozone member nations and the UK:<\/p>\n

…Ireland, Netherlands and Belgium seem most exposed to a Brexit.<\/p>\n

There have also been media reports that Deutsche Bank has set up a working group to assess whether London business should be returned to Frankfurt, in case of a Brexit.<\/p>\n

Other international banks have mentioned contemplating a partial move from their London offices too, back to the continent in the case of Brexit.<\/p>\n

Furthermore, industries outside finance may also move to the continent if trade terms are adversely affected by Brexit.<\/p>\n

Another direct economic impact from a Brexit on the rest of the EU, could be the contributions to the EU budget made by EU member countries.<\/p>\n

As the UK is one of the net contributors to the EU budget, all other countries would have to contribute the missing money.<\/p>\n

The largest burden would be on the larger EU member economies, with Germany having to pay an additional EUR2.5bn on top of current EU30bn contributions to the EU budget.<\/p>\n

EUR\/GBP effect on summer holidays<\/h2>\n

This summer will mark a change for British tourists heading abroad.<\/p>\n

They should feel the effects of a vote to leave the EU, but they shouldn’t expect to see any major changes to their holiday.<\/p>\n

For travellers, the immediate impact comes in the form of spending while abroad.<\/p>\n

Why?<\/p>\n

It now costs more to buy foreign currency like the euro, after the pound tanked – hitting its weakest level against the US dollar in 31 years.<\/p>\n

My advice for UK-based travellers is to carry a prepaid travel card, which will avoid carrying cash and cover your transactions.<\/p>\n

You can also use these travel cars to lock in an exchange rate for a particular day.<\/p>\n

Latest ECB meeting and EUR\/GBP<\/h2>\n

Representatives of the world’s biggest economies met over the weekend at the G20 meeting.<\/p>\n

These countries are focused on working toward supporting global growth and better sharing the benefits of trade, but:<\/p>\n

…this meeting was dominated by the impact of Britain’s exit from Europe\u2026<\/p>\n

…and fears of rising protectionism.<\/p>\n

Protectionism is a term that describes when countries raise taxes on imports to make their domestic products more competitive i.e. to protect their domestic economy.<\/p>\n

Despite this, GBP has witnessed recent strength due to oversold conditions resulting from the Brexit vote.<\/p>\n

While Article 50 has not been submitted to the EU by the UK, the reality is that the Brexit is most likely to occur.<\/p>\n

This has created some uncertainty on the EU project as a whole and as a result, the euro has lost some of its shine.<\/p>\n

On the topic of shine, gold has staged a drop in value as the general risk-on mentality prevails in more risky markets like property and equities.<\/p>\n

However:<\/p>\n

…there seems to be a strong positive correlation between the EUR\/GBP pair and Gold\u2026<\/p>\n

…as H4 200 bars using Admiral Markets correlation tables<\/a> stands at +94%.<\/p>\n

So generally during risk-off:<\/p>\n

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  1. Gold is popping as a safety trade, and<\/li>\n
  2. JPY and EUR may be going up, while<\/li>\n
  3. lots of red colour can be found on the stock traders screens.<\/li>\n<\/ol>\n

    \"correlation.jpg\"<\/p>\n

    This is fundamentally supported by the fact that the UK has lower gold reserves (in its foreign reserves) and therefore less exposure to the precious metal, than the EU.<\/p>\n

    Things can change over time of course, but right now:<\/p>\n

    …euro has been going up in risk off.<\/p>\n

    The following video shows how Forex pairs and EUR\/GBP were moving during the recent conference.<\/p>\n