The financial market is prepared for everything, but even it assumed that Brexit was improbable until the referendum results were revealed. The UK, until that point, had positioned itself as a financial powerhouse, due to what is commonly referred to as the Big Bang, which brought about a modernisation to the Forex market in the UK and set London as one of the most influential financial capitals of the world.
How Brexit will impact the Forex market is still largely uncertain, as the leave date has been extended once again, a general election has been called, and a deal has not yet been hashed out.
The Immediate Reaction to Brexit
To give a clear understanding of how Brexit will likely impact the Forex market, it is essential to look at how it has already impacted the market. Following the referendum, the pound plummeted to a 31 year low overnight.
Since the Brexit vote, the GBP has been fluctuating wildly.
The Difference Between a Soft and Hard Brexit
The uncertainty makes it difficult to plan, and to date only estimations and approximations can be made of what the true outcome will be. A senior currency strategist at Rabobank, Jane Foley, explains that though the uncertainty is undoubtedly bad for the pound, “…the worst outcome is a hard Brexit.”
Thankfully, the delays have actually helped the pound stabilise, as it has given markets time to plan for both the best and worst-case scenario. With these preparations and a soft Brexit, Forex market trading and the UK currency are likely to remain decently stable.
The Free Floating Market
Before 1971, currencies were fixed to the Gold Standard. This leveraged currencies, including the UK’s against the US dollar (as it had the most gold during the time of the initial agreement). Since then, it has become free-floating, or, in other words, traders and buyers determine the currencies’ worth.
In most cases, this provides a safety net, especially as many traders today don’t look necessarily at economic data, but rather at politics. It’s no wonder this is the case, as global policy has always impacted the Forex markets either directly or indirectly, as you can see from this IG timeline.
In some cases, policy can bolster the market. The Big Bang, for example, resulted directly in London increasing £700 million in trades per day up to £5 billion and, in turn, becoming a financial capital.
The policies that are created once Brexit occurs will similarly impact the market. Considering the UK functions on what is known as an intangible economy (meaning the pound’s value comes from services, rather than raw materials), the ability to trade with Europe and the world is critical.
How Will Brexit Impact Forex Market?
There isn’t enough data to say. The delays and roadblocks to achieving Brexit have certainly solidified markets, but the uncertainty is not letting the market flourish as well as it could. As there is not yet a deal on the table and an election in December, there is no way to accurately predict how the Forex market will be impacted. Currently, the pound is performing weakly against the USD and is even lower than the immediate aftermath of Brexit. As of October, it seems the GBP currency is struggling in a bull flag, despite the confirmation of another general election.