How Will UK's EU Demands Impact GBP/USD?
Elliott Wave Forecast | Feb 01, 2016 10:54PM ET
We argued in our article on Dec 30th 2015, Will Euro Referendum and Brexit affect GBP?, that pound sterling could perform poorly in 2016 due to the domestic and political uncertainty surrounding U.K.’s membership in the European Union (Brexit).
In the same article, we pick GBP/JPY to extend lower due to the 5-swing move from 2015 peak, and this proved correct as the pair continued to drop 7.4% from 177 to 164 before the Bank of Japan helped the pair regain some of the losses.
In fact, other than New Zealand dollar, pound sterling is one of the weakest currencies in January 2016 as the table shows below:
February however can be an important month for pound sterling, as UK Prime Minister David Cameron starts the negotiation with European leaders on UK’s relationship with the European Union.
UK’s demands consist of 4 points:
1. Allowing Britain to opt-out of the European vision of the “ever closer union”
2. Giving greater powers to UK and other EU members outside Eurozone to block unwanted EU proposals
3. Restricting welfare benefits to EU migrants until they have been working in the UK for 4 years
4. Securing recognition that the euro is not the only currency in the European Union, and UK does not need to contribute to eurozone bailouts
Out of the 4 demands, the most difficult one right now is the one regarding welfare benefits, as it breaches the EU’s principle of non-discrimination against EU citizens. Cameron made it clear that he will support and campaign for the UK to remain in the EU once they secure a compromise.
If Cameron can secure a deal this month, then the referendum can take place as early as June, but if the negotiation drags longer, then the referendum likely will take place in September. Both parties understand it’s in their best interests for the UK to remain in the EU and try to settle this issue as soon as possible.
There are 2 important dates to watch this month. February 5 is the first date where senior officials from all 28 members in the EU begin their discussion on the proposal. This is going to be the first test to get an idea of how far the differences between the 2 camps are. The second date to watch is February 18-19 European summit, which is the deal’s target date.
Pair to watch
It is still not known at this point whether a deal can be made this month. However, even if there’s no deal, if there is enough encouraging progression with the discussion, it is still possible to see pound sterling react positively to the development. In the event of good news with the talk on Feb 5 or Feb 18-19, an interesting pair to watch is GBP/AUD, shown below:
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From the peak at 8/24 last year, this pair has made a 7 swing lower, which is a corrective sequence. Although a marginal low still can’t be ruled out to complete swing #7, this pair may start to rally to correct at least the cycle from November 2015 peak if there’s good news coming out from the negotiation.
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