How Will Global Foreign Exchange Markets React To Brexit?

While Donald Trump has taken center stage within many news circles, the recent Brexit is actually just as important. The Brexit is simply the plan for the United Kingdom to leave the European Union (BRitish EXIT). While more political than physical in nature, this movement will impact areas such as travel, trade, financial transactions and even the residency statuses of Britons living abroad.

Although the entire process will take approximately two years to complete, many are wondering how the Brexit will impact the global foreign exchange (Forex) markets. No one is entirely certain and yet, there are a few solid predictions which seem to be the most likely to occur in the near future. Let’s take a closer look.

The Questionable Value of the Pound

This is the most obvious concern, so it should be mentioned first. There are two major reasons why the pound is likely to be hurt from a medium-term perspective. First, investors are concerned about how the UK will renegotiate its current trade relationship with the European Union. This might very well hurt some domestic businesses and as a result, the value of the pound may fall.

The second issue is arguably more psychological in nature. Uncertainty always affects the markets and this situation is no different. The fact of the matter is that while the Brexit has been formally triggered, very few (if any) analysts are exactly sure of how negotiations will take place. This is entirely new territory and therefore, there is much more of a bearish stance.

Americans and their European counterparts are therefore somewhat concerned. Until concrete steps are laid out, it is likely that we will continue to see a weak pound. However, is the pound the only currency to watch?

The Dollar-Pound Relationship

Many Forex traders regularly monitor the USD/GBP relationship. In the past, the pound was normally stronger than the dollar. This was rather predictable and while small fluctuations did indeed occur, it was a worthwhile bet that the British currency would remain relatively stable. This has now all changed thanks to the Brexit (as well as the emerging economic policies of the Trump administration). Many currency traders are looking towards the dollar with a much more favorable attitude when compared to two or three years ago.

The major question is whether or not this American currency will represent a safe haven when compared to its counterparts across the Atlantic. Although the verdict is still out, the fact of the matter is that we will likely see a much stronger dollar in relation to the British pound.

The Euro Question

Forex investors are also keeping a close eye on the value of the euro when compared to the pound. Will a falling pound benefit UK exports and if so, could this harm the value of the euro? Or, might the geopolitical instability within the European Union cause a continued parity with the pound?

These are two very important questions which currency analysts are attempting to answer. Others question whether or not the Brexit will trigger similar moves in countries leaning to the far right such as France. Such a concern could negatively impact the value of the euro in the future.

 

The Markets as a Whole

Up until this point, we have examined potential currency changes and how these might evolve. However, what about the Forex markets as a whole? Can we make an broad predictions about how they will continue to react?

The first viable observation is that this sector will see an increased amount of volatility due to the amount of speculation taking place. Rumors can cause massive rises or falls within a very short period of time. As a result, it is likely that individual investors will embrace a much more conservative stance. On the other side of the proverbial coin, speculators could very well look to take advantage of any short-term swings. Either way, the Forex markets look to be in for a rough ride ahead.

 

Trading Strategies

We should also mention that investors will be looking to adopt more risk-averse trading strategies as opposed to standard open-market positions. One example of this can be seen in the rising popularity of spread betting. Spread betting is better than conventional trading due to the fact that investors can enjoy benefits such as a tax-free income, the ability to “short” a position and the potential to employ margins. The main takeaway point here is that many traders will be forced to rethink their traditional approaches in order to accommodate a rather unclear future.

Of course, the Brexit will not happen overnight and a significant amount of negotiations still need to take place. It is nonetheless an undeniable fact that this move will have a massive impact upon the world of financial trading for years to come.