The Brexit: A Real Possibility?

This article was written by Daniel Sesay, Chief Market Strategist at The CityTA.

The UK has been threatening to exit the EU for some time. If we think back to 1992, when Britain was forced out of the ERM and ultimately saved itself from the debacle that is now the European Union, some will say it was a blessing in disguise.

The UK continues to struggle with its neighbours as we move past the first decade of the millennium. In defense of the UK, the EU is becoming more of a burden than a help. The movement of labour from Europe to the UK is at this point one sided. It appears that for every 1 job the EU creates for a local worker it sends 2 across the border that eventually fill the spot. The pressure on welfare and public service is also a noticeable conflict as local government can’t exactly discriminate.

Cameron is faced with an awful choice, do nothing and risk the wrath of the British public, act and risk endangering the last thread holding Europe together. If the UK quits, it’s only a matter of time before Greece and co. up sticks and leave.

So where does that leave Germany and the EU? The EU perspective is, freedom of movement should not be endangered at any cost and Britain should leave if it desires. In my opinion a massive gamble. Germany needs their social experiment to work, a domino effect will eventually ruin Germany’s massive trade surplus generated mainly by European consumption.

I think it is in everyone’s interest that Britain stays put. The Germans are known for playing hard ball and would rather show weakness behind closed doors. Christine Lagarde, IMF Chief, is already concerned about the economic impact of a British exit and urges a resolution. Britain’s financial relationship with Europe makes it a strategic partner for Germany.

At a time when the Chinese appear to be dropping the ball, the EU can’t afford another catastrophe, they will not survive it.

The impact on the FTSE 100 and cable are plain to see. The ETF FXB: Sterling Trust currency shares traded $139.70 a share with the FTSE eyeing a re-test of the 5700 index level. A break will no doubt open more downside, the rally so far looks like a weak relief rally, the 5250 level seems like a good point to consider for the future. It is unlikely that a Brexit will end well for the UK, but it will not end well for the EU either.

Is the Brexit a possibility? It sure is, but prepare for long drawn out meetings from EU members as they slowly wake up to the reality that David Cameron is a man with nothing to lose. Meanwhile expect sterling and the FTSE to keep testing new lows till a decision is reached.