EUR/GBP outlook: how will sterling fare in each Brexit scenario?
As the Brexit process reaches a crescendo, EUR/GBP is likely to exhibit extreme volatility in the months ahead. How will the pair move in each Brexit scenario?
Brexit uncertainty has been hitting the UK economy throughout the years following the 2016 referendum, with traders ultimately reflecting that in economic decline through a weaker pound. The pound is typically the foremost barometer of sentiment around an economy, with a direct correlation between weaker growth and a weaker pound. Sentiment and monetary policy also play a part, yet all are intrinsically linked in providing markets with an overarching view of where the pound should be. However, with the UK in the grips of a temporary period of uncertainty, Brexit represents an opportunity given the propensity of major market moves in the aftermath of its conclusion.
How does the 2016 referendum guide us?
The referendum result highlights the potential reaction once we get greater clarity on the form of Brexit (if any) the UK will take. On the daily chart, we can see a sharp appreciation in the price of EUR/GBP in the aftermath of the referendum result, with the continuation of that rally playing out through much of the months that followed. This highlights the relationship between perceived economic weakness and the trajectory of the pound (note that GBP decline continued for months until data emerged to lessen fears). With that in mind, the ultimate Brexit outcome will be directly reflected in the value of the pound.
EUR/GBP strategies: possible Brexit outcomes
Now let’s look at the potential Brexit outcomes and how they could move the EUR/GBP pair.
How to trade EUR/GBP in a no-deal Brexit
A no-deal Brexit is widely expected to have the most detrimental impact upon the UK economy, with the time taken to agree a deal to resume some form of normality largely unknown. The gains seen in EUR/GBP over recent years have taken us into a peak of £0.9435, and that has to represent a target which would likely be surpassed in the worst case scenario of a no-deal Brexit. However, with the slowdown likely to extend for some time yet, that could just be the start of the move, with the depth of the economic decline to dictate the size of the move in the longer term. It is also worth noting that this scenario would bring easing from the Bank of England (BoE), thus driving the pound further lower.
How to trade EUR/GBP in a soft Brexit
A soft Brexit is the middle ground that is harder to gauge from an economic perspective. While the UK would invariably suffer from a significant amount of uncertainty over how well businesses will adjust to the new conditions, the recent threat of a no-deal exit means this scenario would likely drive sterling higher. With this in mind, despite the possible disruption to business, any deal with the EU would likely spark a relief rally for the pound over the short term. Much like the referendum, it takes time to gauge how businesses are being impacted. Thus, it is likely that initial market action would be driven by sentiment and BoE actions rather than the data.
How to trade EUR/GBP with no Brexit
This could be a huge bonanza for sterling traders, with the massive devaluation in the pound evident through the years unwinding. The journey to such an outcome would be crucial, as a straight cancellation of article 50 without public involvement would likely ramp up radical support for the likes of the Brexit party. However, a second referendum that sought to overrule the first decision would no doubt provide the most advantageous scenario for sterling. EUR/GBP has gained over 1200 points since the morning of the referendum, and thus it would be likely that such a move could see us head back down below towards the £0.80 mark.
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