Anyone with the slightest interest in forex markets will be aware of Brexit – the United Kingdom’s protracted withdrawal from membership in the European Union. With the clock swiftly ticking down the days until the deadline of 29th March this year, there is a great deal of uncertainty surrounding the whole event, even at this late stage.
The UK government is still trying hard to find a solution acceptable to the Hard Brexiteers, the pro-Remain supporters and the EU, which is a nearly impossible task. A vote on the Brexit deal that is currently on the table will take place in the House of Commons during the week of 14th January.
With the opposition now openly wanting a general election and other voices calling for everything from a second referendum to a no-deal exit to trade on WTO terms, the stakes are high, and the situation is volatile.
Of course, volatility is a big attraction for CFD traders. as it makes price movements more likely to happen and swings more radical than they might usually be. This gives traders the chance to take a position and reap rewards, but as with any trade, choosing the right moment to make a move needs to involve accurate information and solid data.
Although Brexit has been affecting a wide range of assets and will continue to do so for many months and even years ahead, its effect on the GBP, or British pound, has been particularly strong. Part of the attraction of money exchange markets for CFD traders is that many different factors can influence movements. This means that traders can use certain tactics and strategies to work out a good position to take.
The pound has had a volatile 12 months, and the run up to 29th March is almost certain to continue this trend. Brexit uncertainty has been the key determinant of the pound’s movement for a while now, with EU Commissioners’ statements and the Bank of England’s (BoE’s) policy announcements having direct and immediate effects.
Perhaps counterintuitively, some market analysts believe that the GBP/USD pair will rally as much as 6% in 2019. However, this is only likely if the so-called “divorce” occurs with an orderly deal in place. The UK would then enter a 21-month transition period, during which time issues could start to quiet down.
Of course, the behaviour of the pound in terms of CFD trades really depends on which forex pairs that traders choose, as each currency may well behave in a different manner depending on how trade deals turn out and overseas exports impact on the UK’s wider economy.
Imports and exports
Approval of the proposed withdrawal agreement does not mean that the dust will settle easily. Instead, it would mark the beginning of a more critical stage. As the UK entered the 21-month transition period, negotiations on future trade relations with the EU would begin.
Even in the face of a well-managed exit from the trading bloc, the UKs future relationship with the EU is certain to take on a new appearance after the transition period ends. Up until now, the EU’s single market has accounted for around 40% of UK exports and 45% of UK imports, so any changes to the current set-up are bound to have a serious impact on the pound’s standing in the international financial markets. Whether circumstances might turn out to be good or bad for the GBP is anyone’s guess right now, as factors are still so uncertain over the very short term, let alone the next few turbulent years.
As already noted, CFD traders who operate in forex markets use many different strategies to work out the best positions to take. A “news” approach can work very well in fast-paced, quick-turnaround arenas such as forex, which is why BoE announcements and policy decisions will be a key element in the coming months and years.
The central bank’s monetary policy dealing with rate hikes and another possible round of quantitative easing will have a large impact on the outlook of the pound. A poll by Reuters found that experts forecast one rate increase for the UK during 2019, from 0.75% to 1%.
At the end of 2018, the Financial Times quoted Stephen Gallo, Head of Forex Strategy at the Bank of Montreal, as saying that the pound was “purely impossible to trade at this point” because of the many possible Brexit scenarios that could come to pass.
“The market anticipates a significant sterling move at some point, and you can see this in the way that three-month implied volatility is going ballistic. But spot forex investors are not going to pile into the directional trade until the Brexit path is completely clear,” Gallo said at the time. Over a month later, not much has changed.
Such a volatile situation has led to some serious hedging. Rabobank Head of Forex Strategy Jane Foley explained: “Some of our clients are extremely confused about how to position themselves.”
She added that as expectations for future price swings increase, investors are finding it hard to decide whether hedging is the right move at this point. Foley commented that “options are expensive at these levels.”
When futures and options fail is often when CFD traders find an opportunity, and for forex traders, Brexit is certainly a once-in-a-lifetime event. The fifth-largest economy in the world leaving a 28-member trading bloc made up of some long-established global economies is a historical occurrence by anyone’s definition.
Although the forex markets regularly handle risk and have sophisticated methods for offsetting dramatic moves, the unsettling nature of the Brexit endgame is something new entirely.
Girome Bono, Chief Executive and Chief Investment Officer at White Marigold Capital, sad that “there are no concrete timelines or even outcomes that market participants can hang their hats on.” As an investment manager who specialises in strategy based on volatility, he is certainly one expert whose words have meaning regarding the Brexit situation.