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Better to Avoid Sterling Ahead of Britain’s Referendum

June 20, 2016 at 8:11 by Vladimir Vyun

Banknotes of 5, 10 and 20 poundsBritain’s upcoming referendum about membership in the European Union remains a hot topic in the news and speculations of market participants. Many analysts advise to stay away from the Great Britain pound ahead of the event.

Moves of the sterling have been hard to predict recently as they were highly dependent on results of polls. Currently, polls show that votes for staying in the EU lead, but that may yet change. And volatility is likely to increase closer the referendum (scheduled for June 23) gets.

But the dangers of high volatility are not the only reason to avoid Britain’s currency. One of the problems for traders is that the outcome of the voting remains uncertain. Yes, it is true that the Bremain looks more likely than the Brexit, but it is in no way guaranteed. What is more, whatever the outcome is, it is hard to predict the markets’ reaction. What if the United Kingdom leaves the EU? The sterling is likely to crash. But what if the UK stays? The answer to that is not as clear-cut as some might think. It is very possible that the currency will surge in case the “stay” camp wins. But will the rally be long-lived? Some analysts argue that it will not be the case. Britain has other problems than just the referendum, and they will not go away magically even if the country stays in the EU. Therefore, the currency may remain soft in the medium to long term even if Britons vote for staying in the EU.

In the light of all those consideration, it will be wise for traders to stay away from the Great Britain pound for the time being. In truth, some experts advise to lighten up positions in all currencies (as well as other types of assets for that matter) as increasing volatility makes it hard to trade, increasing risks and chances for losses. For example, DailyFX suggested:

Retail traders may be best served by following what many institutional traders are doing for this event, which is tightening up risk and preparing to watch the referendum from the sidelines; or at the very least looking to trade these themes in markets not directly linked to the performance British Pound.

If you have any questions, comments or opinions regarding the Great Britain Pound, feel free to post them using the commentary form below.

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