Forex – what can the 2014 Scottish referendum tell us about trading the pound around the Brexit referendum?

For forex traders, arguably the biggest single risk in the markets is Brexit. If Britain votes to leave the European Union on June 23rd, currency markets are braced for significant volatility. A vote for the status quo will also produce an effect as traders react to the news and amend positions.

Naturally the most impact is likely to be seen in sterling pairs, with GBPUSD and EURGBP probably the two hottest Brexit forex pairs.

So just how will the uncertainty around the Brexit affect the pound? The past can tell us quite a lot.


Scottish Referendum Lessons


Conveniently the closest thing we have to a Brexit vote happened just two years ago – the Scottish independence referendum, which was held in September 2014.

The No vote (to stay in the UK) eventually won with 55% of the popular vote – but polls in the weeks leading up to the referendum suggested there was every chance Scots would vote for independence. The similarities with the Brexit vote are instructive.

Trading on the pound was volatile in the run up to the vote. Fears that Britain would be broken up – and the ensuring uncertainty over the currency – saw the pound shed around 11 cents against the dollar in the two months ahead of the plebiscite.

The initial euphoria produced a big spike for the pound, but this quickly wore off. Sterling continued its trend lower versus the greenback all the way through to April 2015. Forex trading is a zero-sum game, of course, so this also has to be viewed in the context of dollar strength as the Fed moved towards raising rates.

Day Trading

Most crucially for many traders is the day-to-day movements sparked by polls. They may be notoriously unreliable, but a poll showing a slight lead for the independence campaign little over a week before the Scottish vote sparked a sharp selloff in sterling.

Brexit is seen as negative for sterling – most analysts expect the pound to dip 15-20% if Britain votes to leave. So polls showing a lead for the out campaign would likely send the pound lower, while any data showing a healthy lead for the Remain camp tend to push it up. Riding out this volatility is the problem for traders but one that presents opportunities as well as risks.

It was a slightly different story against the euro, although the underlying factors were the same. The pound treaded water for the two months before the vote and cranked higher after the No vote.

This was against a backdrop of severe euro weakness and so the effect of the uncertainty was to curtail sterling gains. This pent up demand gushed forth after the vote.

Again polls made a big difference to EURGBP – polls signalling a Yes win produced bouts of extreme volatility where the pair swung by as much as 3% in a short space of time.

Brexit Redux


These trends are being repeated in the run up to the vote on Britain’s membership of the EU.

Individual events and polls are again important and traders need to be on the lookout for signs of movement in either direction.

For example, momentum behind the Out vote in February – sparked by Boris Johnson’s intervention - led to a deep dive for the pound versus the dollar.

Meanwhile the pound jumped to its best level in five weeks after US president Barack Obama weighed in with support for David Cameron.  A poll on May 17th showing a healthy lead for the Remain side led to sterling’s best rally in three weeks despite weak economic data.

Polls have largely suggested that the Remain side will win. Betting markets too predict the UK will stick with the EU. But if we get a Scottish-style poll shock – one that shows a lead for the Brexit campaign – there could be some major swings in sterling forex pairs.