Why are Forex Traders Watching Brexit?
Volatility is what drives the forex markets. The higher the volatility, the more room there is for traders to earn profits. And, one of the biggest events over the past couple of years to have affected the forex markets has been the Brexit vote. In fact, these days, it is politics, more than economics that has been leading to large fluctuations in the forex world. Classic examples include the market reaction to the Brexit vote and the election of Donald Trump as the President of the United States.
The Immediate Impact
Brexit will be a complicated process, given how well-intertwined Britain has been with the European Union, its legislation and the ‘single market’ concept. These complications are causing huge uncertainties regarding both the Great British pound and the British economy. The immediate impact of the Brexit vote resulted in a significant dip in GBP/EUR levels, with the GBP falling from €1.30 pre-Brexit to €1.09 in just four months post the Brexit vote. Almost half of this 16.15% decline occurred in the three days following the Brexit announcement.
With such volatility in the pound, forex traders moved towards the US dollar, which is the world’s reserve currency and, therefore, a safe haven during times of forex volatility. This move to the USD, pushed its price up, which moved from €0.878 on June 23, 2016, to €0.908 on July 26, 2016. Of course, these effects did wear off with time, and the GBP began to see a slight recovery.
Weathering the Brexit Storm
The problem for forex traders is that the Brexit timetable appears to be fairly fluid. Two dates are more or less certain. March 29, 2019, is being called “Brexit Day,” while autumn 2018 is supposed to be the time when the terms of the exit deal will be finalized.
While expectations are for the GBP to see modest rises in value in the longer term, day-to-day fluctuations are likely to depend on the progress being made on Brexit negotiations. Any positive news regarding an agreement could boost the currency’s value, while a setback could weaken it.
In the end, the agreements reached regarding the rights of EU citizens, the Irish border, future trading relationships between the UK and the EU and more will determine which way the GBP price moves. For instance, if the UK ends up having to pay a large exit bill, it could drive the GBP down because it will impact confidence in Britain. Similarly, if the trade deal is less than satisfactory for the country, the impact would be bad on the pound sterling.
Needless to say, whether you are trading the GBP or not, the movements in this currency will impact values of other currencies, similar to what happened to the US dollar immediately after the announcement of Britain leaving the EU. The only way to stay prepared for any fluctuations in the currency markets is to keep an eye on the latest developments in the Brexit negotiations.
The problem is that if you are a forex trader, events that lead to major currency fluctuations will occur every few years. If it isn’t Brexit, it will be trade wars between the US and China or something else. The only way to always stay prepared is to keep up with geopolitical and economic developments worldwide.