This is the year that we should see how Britain’s future relationship with the European Union pans out. Brexit is undoubtedly one of the most significant political events for the UK over the last few decades, and its impact on the Forex and global markets will last for a long time. So, regarding Brexit and the Forex Market – what could happen?
What are We Looking at in 2018 for Brexit and the Forex Market?
The inflation and interest rates, along with the stock markets, could all be affected by the twists and turns of the Brexit negotiations. The Bank of England is likely to increase interest rates twice in 2018, once in May and again towards the end of the year. Market performance will depend largely on the decided import tariffs and regulations. Immigration laws between the UK and its trade partners could get complicated if the negotiations go south. The divided conservative party calling for early general elections will only add to the risk and uncertainties.
All these factors will affect the GBP. When the forex markets are surrounded by uncertainties, the result is usually mass sell-off, which results in a decline in currency prices. This is what happened in the initial period, post-referendum. The Pound Sterling took a major blow and investors were pushed towards gold as a safe haven.
The GBP Outlook
Due to the sense of shock at the outcome, some experts explained, the Sterling Pound suffered. Experts predicted that due to the nation’s high debt situation, an exit from the EU would lead to the UK defaulting on its loan repayments. But surprisingly, the GBP recovered gradually. The forex market right now is calm, based on the belief that the exit will be less damaging than expected.
But in the event of a “no deal,” a second shock of equal or perhaps greater magnitude will strike the currency, the repercussions of which could be severe. If the UK must pay an exit bill, this large sum will affect confidence in the nation and affect its currency’s value significantly. While that would be a boost for firms who largely depend on foreign earnings, domestically focused firms will suffer.
What happens to inflation would also largely depend on the movement of the GBP. A hard Brexit could lead to a sliding Pound Sterling, which will result in high inflation.
On the other hand, the election of the Labour Party under Corbyn might bring more extreme changes in the value of the Pound, rather than all the Brexit drama. If the market doesn’t trust his policies, the BOE would have to increase interest rates, following a severe run on the Pound. The future rise in rates might support the GBP in a longer time frame, but day-to-day fluctuations will depend on the progress of the Brexit negotiations.
For traders, the timetable has to be followed very closely. Uncertainty looms for now, but there are two fixed dates on the calendar so far. Autumn 2018 is the time when the terms of the exit deal will have to be agreed upon and, of course, March 29, 2019 (Brexit Day), which seems far off for Brexit and the Forex Market.