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This has led to some economists arguing that, should Britain vote to leave the EU, in the immediate aftermath of the vote, the pound could fall as low as $1.25. As such, prior to the vote, traders should be positioning themselves for turbulence across longer periods. With sterling falling, a number of investors looked to UK government debt, even as appetite for sovereign bonds was weak, with forex traders worried about their investments and looking to diversify their portfolios.

Although the markets are certainly far from in turmoil at the present moment, the referendum uncertainty has made the markets far less comfortable, with many believing that it is not set up for a potential Brexit due to a relaxed “things will work out alright” attitude.

How Would Markets React to a Brexit?

Of course, making long term predictions about the potential impact of a Brexit is incredibly difficult, as nobody knows for sure. There appears to be acceptance that Britain leaving the EU would cause short term turbulence, with the pound lowering in value but, after that, nobody is really sure.

A study by Open Europe has shown that, as a worst case scenario, the impact of a Brexit on UK GDP could mean a shrinkage of 2.2% by 2030. This would happen if the UK failed to strike a trade deal with the rest of the EU and didn’t seek free trade again. However, the study also shows that, as a best case scenario, the UK’s GDP could grow by 1.6% by 2030. This would involve the UK striking a FTA with the EU, embarking on an ambitious deregulation of its economy and opened up almost fully with trade with the rest of the world

However, with prominent ‘leave’ campaigners such as Boris Johnson, Michael Gove and Nigel Farage even admitting that they’re unsure what the UK would look like post-Brexit, the waters are muddled, which is why many agree that the pound would almost definitely fall in the aftermath of the referendum result.

With the long term economic impacts entirely dependent on the trade deals that the UK is able to sign post-Brexit, it appears as though there is a large amount of spin from both camps about whether the UK would be better off ‘in’ or ‘out’ in the long term.

Conclusions

To conclude, as the referendum draws closer, and as the polls narrow to give ‘leave’ a greater chance of winning, the markets are beginning to panic, with the pound becoming much weaker against the dollar.

If the UK does leave the EU on June 23rd, it appears likely that this will cause a further fall, with sterling struggling in the short term. However, the long term impacts are too unpredictable to predict, as it will largely be dependent on whether the UK is able to strike trade deals and free trade agreements. Whether short term costs will be replaced by long term gains is anyone’s guess, and the UK’s GDP could be anywhere between 2.2% lower of 1.6% higher by 2030.

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