How Brexit Is Going To Affect The Foreign Exchange Market

While there remains time for the UK and the EU to strike an amicable free trade deal, Prime Minister Boris Johnson has suggested that the single bloc continues to insist on terms which no elected British leader can accept.

This is continuing a trend that has persisted since the EU referendum vote in June 2016, with sustained uncertainty having continued to impact on currency values and exchange prices across the globe.

We’ll appraise this impact in the post below, while asking how you can prepare for this as a forex trader.

The Impact of Brexit on Currencies and Economies

In the immediate aftermath of the June referendum, the pound sank to a 30-year low as the forex market went into freefall.

Further lows were plunged the following January, when the pound slumped to 1.13 against the Euro following Theresa May’s Mansion House speech and apparent commitment to an uncompromising Brexit deal.

Since then, the EUR/GBP pairing has continued to trade within an ever depreciating range, while recently falling below the psychologically significant 0.900 barrier as the prospect of a no-deal Brexit became increasingly likely.

Interestingly, the GBP/USD pairing has also experienced volatility as a result of this Brexit uncertainty, with the declining value of sterling offering a key indicator of wider market sentiment.

This trend is expected to worsen on the back of a no-deal Brexit, with forex trading broker Tickmill forecasting that the GBP/USD will depreciate by between 10% and 15% in the wake of any announcement.

Even in the event of a withdrawal and trade agreement being reached, the pound is sure to experience a nominal decline and continue to perform poorly in relation to the greenback and potentially the Euro.

How to Prepare for This as a Forex Trader

While a no-deal Brexit will almost certainly increase the cost of EU imported products through the imposition of tariffs and disrupt international businesses (compounding the impact of COVID-19 in the process), there are steps that forex traders can take to negate the market’s volatility.

In fact, this can even be used to the advantage of traders, who can speculate and hedge against the pound as a way of profiting as the value of sterling depreciates.

In particular, hedging against assets such as the GBP/USD could prove pivotal, both in terms of factoring in the decline of sterling and leveraging the relative strength of the dollar.

As for the EUR/GBP, this pairing may be poised to plunge below the aforementioned 0.900 mark in the immediate aftermath of a no-deal Brexit.

It’s also hard to determine precisely when this trend may reverse, with much depending on the UK’s preparedness for a no-deal scenario and its ability to sustain trade as easily as possible.