FX markets appear to be betting on a Brexit deal which means things could get even more turbulent if a deal cannot be agreed on.
Brexit is coming, definitely at last, but even with talks entering the final days we still don’t know if the UK will walk away with anything resembling a trade deal.
However, dampening sentiment that a deal will indeed be agreed is the news of the unsuccessful discussions in Brussels between Boris Johnson and Ursula von der Leyen last night.
Many investors will be looking to make money from Brexit volatility. Sterling is likely to experience plenty of ups and downs as negotiations reach the final straight. In particular, the GBP/EUR pair have been heavily affected by developments. A week ago, as experts predicted a breakthrough where the GBP made gains. However, with talks showing little sign of a breakthrough, sterling fell to 1.121 against the EURO.
At the time of writing it remains stuck as 1.10. Even so, experts still seem bullish suggesting it could edge up to 1.14 as the ticking clock pushes both sides towards a deal.
If they manage to agree something reasonable, we can expect GBP to take a jump. Without a deal, we can expect a reverse with some experts suggesting the two could hit parity.
Bakers McKenzie, predicts a 6% GDP hit to the UK in the event of a no deal. Brexit could cost the UK economy £84bn a year in lost GDP, which is more than the £54bn GDP expected to be lost as a result of COVID 19.
The Bank of England has echoed the call that Brexit could be a bigger hit to the economy than COVID.
The stark truth is that, without a significant breakthrough the UK risks subjecting itself to a double economic hit.
Volatility will likely continue regardless of whether the two sides reach a deal. Markets will react to how events unfold. For example, if economic news post Brexit is better than expected, we could see GBP climb as investors start to feel project fear might be over blown.
Likewise, even a deal itself does not guarantee economic stability. Markets will be scrutinising every economic development in the weeks and months after the deal.
Plus, we should always remember that Brexit is just one source of volatility. A trade deal with the USA is a top priority, but the arrival of a new administration throws everything up in the air. Reports suggest Joe Biden would look unfavourably on a no deal exit, especially anything which threatens the Good Friday agreement.
A no deal Brexit would potentially reduce the chances of a favourable deal across the pond which will again weigh heavily on the markets.
Perhaps the biggest source of volatility, though, could be if the result of a deal surprises markets. As the process has drawn towards a conclusion GBP has repeatedly surged with every piece of good news.
For example, after positive news in November Sterling jumped 0.4% against the Dollar. Every piece of good news creates an amplified short-term reaction from the markets.
Even now, as negotiators enter the last chance saloon, markets still seem to be working on the assumption that a deal of some kind will, sooner or later, be done. This could be dangerous because events which surprise the markets cause the greatest volatility.
We could therefore be in for a repeat of the 2016 referendum when markets gained in expectation of a vote for remain only to crash when Britain voted to leave.
Last but not least it’s important to remember that Brexit is about much more than a dance between the UK and EU. Every currency will be affected. Every piece of bad Brexit news has seen GBP plunge against the Dollar. Back in September, with no deal fears rising, Sterling dropped sharply against both USD and EUR. It fell to 1.096 against the Euro and 1.297 against the dollar, 3.7% lower than its 12-month peak.
A no deal break between the UK and the EU would send economic tremors around the world, adding to all the disruption already caused by COVID 19. Such volatility would be good news for the dollar which is seen as a safe haven currency during times of economic distress. Speaking to the National, one expert, even suggested Sterling would drop 10% against the dollar on a no deal Brexit.
The only certainty, therefore, is uncertainty. Deal or no deal will mean a volatile market for the foreseeable future. In such circumstances it pays to work with a partner who understands the market and can offer fast, seamless, and low-cost execution. This is one reason why our platform at MillTechFX could prove so effective.
Access to multi bank execution could help you to save money and the ability to automate many processes will free your team up to concentrate on what they do best: assessing the market and make fast, effective decisions.
Keywords: Brexit, Foreign Exchange, GBP, Sterling, FX markets, low-cost execution.
Picture: photo created by kjpargeter