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October 5, 2016

Euro Awaits the Brexit with Bated Breath

The Euro region is in the news again and so is the euro, some for the right reasons and some for the wrong reasons as well. And as if this wasn’t enough, those who track the live crude oil prices would also be seeing the price see-sawing based on the different happenings from around the globe. A great place to be, if you were a day trader or a scalper but not very great if you are an investor looking for some long term trading opportunities.

Ever since the surprise vote for Brexit around 3 months back, the market has been sceptical and also confused on what would happened to the Euro region and also the UK post-Brexit. Everyone understands and accepts that the actual process of Brexit is going to be a long and arduous one fraught with various possibilities. Over the weekend, the UK PM May announced, after what seemed like an eternity, that she would be invoking Article 50 in March of 2017 which will be the first step in the actual process of Brexit. This is likely to increase the volatility in the prices of the Euro and the pound over the coming days and as more and more details emerge about the actual process, we could gain more clarity and we could also understand on who stands to gain more out of the arrangement and can see what the Euro region gets and loses out of this process. This will help to gauge the correct value of the Euro in the coming months though it could take more than 2 years for the entire process to be completed. Also, we find that oil has basically replaced gold as the most important commodity of the world and with that in mind, any changes in the live prices of crude oil are also likely to affect the value of the Euro going forward.

One Month EURUSD as of 10:30am US CST, Oct. 5, 2016

What has been most noticeable ever since Brexit is the fact that the volatility of the Euro has become highly restricted. Just a glance at the monthly chart of the Euro would tell us that the volatility has basically died down and the currency, which used to have a daily range of 80-100 pips, now has a monthly average of only around 200-250 pips. Some of it is coincidence as it is the middle of the year and there is not much happening on the economic front in different parts of the world but the fact is that we believe that some of it might be due to design as well. Since the Brexit vote, the pound has lost a lot of value. Traders and investors alike are not sure how far the impact of Brexit would be on the UK economy but going purely on FX terms, the UK and the pound has been hard-hit so far. With this in mind, the bankers and the finance ministers and economists are pretty clear that they do not want a similar impact on the Euro as well. If that happens, the entire Euro region would lose a lot of value and the economies of all countries that are involved would be severely hit.

So, it is in the interest of the Euro region countries that they keep the Euro under check and ensure that it does not fall by much. With the US rate hike imminent over the next few months, it is likely that the prices of all currencies and commodities including the crude oil price, will be impacted by this hike and that makes it all the more important to keep the Euro prices under control so as to avoid the negative impact of a falling Euro and a falling pound as well.

So how does this impact the traders and investors? This could be a tough time for investors in the Euro who are looking for long term gains on the EURUSD pair as the price is caught in a very tight range for the past few months with not much movement either way and no sign of a range break as well. But the current situation is a dream come true for day traders and range traders who can be fairly sure almost every time that the ranges would hold for the day or the week and they would know that as long as they wait for the price to reach the fringes of the range and then take a trade there, they should be safe almost every time. This is a great opportunity for them to make some serious money as long as they guard themselves against the eventual breaking of the range. All that they need to do is to have a SL outside the range and prepare themselves mentally that the range will eventually and during that time, they would have to take that loss. Like any other major event, this event is also likely to affect the prices of many other currencies and commodities as well and this could be an useful event to track for those who track the crude oil prices as well as it would be an important fundamental event that they would need to keep an eye on.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: Euro Awaits the Brexit with Bated Breath Rating: 5 Reviewed By: EconMatters