#IGForexChat: the effect of Brexit on forex markets

On Thursday 18 October, we invited two forex experts into the IG studio for the second #IGForexChat. With the UK due to formally leave the EU on 29 March 2019, Sara Walker sat down with economist Simon French and market analyst Nicholas Cawley to discuss how the Brexit negotiations could affect the markets, and how a hard or soft exit from the EU could affect traders.

How close are we to a deal between the UK and the EU?

Simon French: It looks likely that we’ll get a deal by the fourth quarter (Q4) of the year. But it’s unlikely to happen by the end of November. Anybody who studies the history of the EU negotiations will know that these negotiations invariably go down to the wire. It may even slip over to January.

Nicholas Cawley: I’m not as positive as I was a few weeks ago. Everything that we get out of these meetings is often the same. It always seems to be the EU saying to the UK that something is not right, and then they must go back and fix it. There will come a stage where there will be a face-off and one side will have to move. From a trading point of view, nothing points to the fact that ‘a person should be buying sterling because something’s going to happen’.

Are we getting somewhere with the negotiations or is it a case of one step forward, two steps back?

SF: The easiest 85% has been agreed, the hardest 15% hasn’t been agreed – delicate factors such as the timing of the transition, the nature of the backstop agreement, as well as the political calculus to go alongside the economic incentives of making a deal. One thing we haven’t yet mentioned is that the EU must carefully consider how much they can give without it being perceived – within the 27 remaining states – that the UK has managed to leave easily and without paying. But they also don’t want to push it too far, because that may lead to an accidental no-deal Brexit.

There are so many factors at play. How do you find a way to trade it?

NC: At the moment, I see no reason to buy the pound. A lot of people think that we may get a rebound when there’s an announcement, but that may take some time. And then Theresa May has to sell it back to the UK parliament. Everything is so fractured there that it's not going to be an easy process. So, I think all the pressure on sterling is on the downside. There’s no reason to hold sterling assets as a trading vehicle, especially with the strength of the US dollar.

Get more insights from the #IGForexChat

If you’d like to find out more about the potential ramifications of Brexit negotiations on forex markets, watch the full interview or choose an area that interests you:

  1. What are the scenarios from here that could lift or sink the pound?
  2. Should we expect rate hikes from the Bank of England (BoE)?
  3. What happens if we get to the end of March 2019 and there is no deal?
  4. Will a hard Brexit already be priced into the pound by the end of March?
  5. How far could the pound fall against the US dollar and euro if there is no deal?
  6. Which is the best GBP cross that we should be watching?
  7. How will Brexit impact the pound during the transition period?
  8. Will companies move their headquarters out of the UK?
  9. How would the pound be affected if Prime Minister Theresa May were to be replaced?
  10. Are there further interest rate rises expected in the US economy and what would be the effect of those on USD?

Brexit

Find out what Brexit could mean for the markets and how a hard or a soft exit from the EU could affect traders.

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