Brexit Vote: GBP/USD Traders, Start Your Engines

Last week, the Bank of England warned that uncertainty about the European referendum is the “largest immediate risk” facing global financial markets. The Bank also said there were “risks of adverse spillovers to the global economy” from the June 23 vote. It was “increasingly likely” that Sterling would fall further – perhaps sharply – in the event of a leave vote, the Bank added.

The Bank’s nine members said that a “vote to leave the EU could materially alter the outlook for economic output and inflation”. MPC member also said there was growing evidence that UK businesses and consumers were putting off “major economic decisions” ahead of the referendum, with real estate and car purchases delayed, along with business investments.

The expert analysts and the BoE really haven’t defined “sharply” so let’s try to put it in perspective using 5% and 10% as our guidelines and place those numbers on a chart.

Last week, the GBP/USD closed at 1.4352, up 0.0096 or +0.68%.

If the Brits vote to leave the EU then the Sterling is likely to plunge. A 5% decline from the weekly close targets 1.3634. A 10% decline from the weekly close targets 1.2917. These represent some pretty steep breaks, but the question remains “how long will it take the currency to reach these targets?”

If the UK votes to remain in the EU then the British Pound is likely to rally. A 5% rise from the weekly close makes 1.5070 the first target. A 10% rise targets 1.5787. Once again as a momentum trader, you should be concerned about the volatility and how fast the market will move towards those targets.

Technically, the main trend is down according to the weekly swing chart. However, despite the recent volatility, when compared to the three-month range, the GBP/USD has essentially traded sideways. This indicates investor indecision, or essentially the same conclusion we can derive from the Brexit polls.

In other words, the weekly close at 1.4352 essentially means that investors don’t know any more about the likely outcome of the referendum than they knew back on March 31, for example, when the Forex pair closed at 1.4359. So while the volatility has been exciting, it hasn’t been indicating anything other than uncertainty.

No matter what technical indicator you use to trade the GBP/USD this week after the results of the referendum are released, momentum will determine whether you make or lose money. Relative strength indicators, moving average crossovers or swing chart breakouts are all going “to work” at some point because the news is going to trigger a volatile reaction, coupled with huge volatility.

However, I do believe that the GBP/USD will have to clear out of its three-month range defined as 1.3835 to 1.4769 in order to produce the biggest and best moves. I think it would be a trading disaster if the Forex pair remained inside this range after the results of the referendum are released. I certainly don’t want to trade a high volatility, sideways market since I prefer breakout moves with big volume behind them.