Trading the Pound on Brexit news (part one)

The pound has been the most volatile developed currency since the June 2016 Brexit referendum, because of the uncertainty surrounding the UK’s economic and political future, after its forthcoming departure from the EU.

This is why traders always pay a lot of attention to Brexit-related news. Technical traders, instead, simply don’t care about the news at all, because they trade only by looking at graphs. In any case, in the long-run, currencies prices are always based on macroeconomic factors. Since last hitting $1.50 during the referendum day, the pound has then held a range between $1.20 and $1.44. The “deal or no deal” dilemma has been the key driver for determining the pound price.

Let’s analyse all the possible Brexit scenarios and their consequences on the Sterling.

A hard “no deal” Brexit seems pretty unlikely, due to the adverse impact a disruption in goods imports and exports would have on UK GDP. Some analysts predict that, under this scenario, the UK GDP could shrink by -0.5% YoY on average over the next decade-plus and that the pound would fall by -10.0% to around 1.20, or below. This would cause pound-denominated assets to become less attractive to global investors.

A temporary “no deal” Brexit would depriciate the pound as well. This would occure if the UK and the European Union agree upon a transition period. They could also agree upon another extension of the official Brexit deadline, to allow for further negotiation.

Any fall of the pound under these scenarios would likely make it a quality long trade, because it would be expected that the currency would stabilize and recover. The main risk to the pound is a failure to establish any trade agreement between the UK and EU, effectively leaving the UK isolated, which would have profound economic side effects. But this is very unlikely.

Should the British government get a Withdrawal Bill and trade agreement, with the UK still part of Single Market and with the transition agreement in place until an established date, this would end the associated traders’ fear. The pound would likely rally up to about 1.50 versus the dollar and 1.40 versus the euro.

Also a second referendum could push the pound towards 1.50 or above against the dollar and up toward 1.40 against the euro. This could happen if the next December general election will end with a victory by the Labour Party pushing for the “Remain” with pressure to introduce a second referendum. Many polls suggest that Britons would vote to remain in the EU if another referendum were to be held.

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