The Brexit Effect on the Pound and the Forex Market

The Brexit effect on the pound has been significant over the past 5 years. Uncertainty surrounding Britain’s trading relationship with both its closest neighbours, as well as with other nations around the world, has weighed heavily on sentiment and confidence.

The final Brexit outcome was one that broadly came as a surprise to the markets. The result of the referendum on the 23rd of June 2016 has continued to drive sentiment toward sterling. We’ve seen some eye-popping benchmarks being hit along the way in FX markets.

As soon as the result became clear, GBPEUR crashed to its biggest intra-day drop in over 30 years. It dropped from around 1.42 against the Euro at the start of 2016 to just €1.10 soon after the referendum.

While sterling has since recovered somewhat, it has been a particularly bumpy ride for the pound. The Brexit effect on Forex markets continues to be felt. It even affected the Australian economy.

In our latest blog, we’ll look at how and why Brexit has had such an outsize effect on the pound. We’ll chart Brexit’s effect on the economy too. We’ll look at some of the factors that continue to impact sentiment to help you with your Forex trading plan and support your further research into the pros and cons of Brexit for FX traders.

Brexit and GBP: A Very Political Relationship

Immediate Reaction

We’ve seen how GBPEUR dropped dramatically in the immediate aftermath of the referendum result. This loss of confidence was driven primarily by market uncertainty surrounding the potential impact of Brexit.

Remember, FX prices are sensitive to big political moves and related events like election results, referendums and central bank decisions.

This is because these have the potential to impact global trading relationships, the price of assets and stocks, and broader monetary policy.

Markets like certainty, and events like these bring an element of the unknown to the table, driving up volatility. This can be both good and bad for traders, because volatility represents both increased opportunity and increased risk.

That’s why it is important to understand the drivers behind market movement, so you can plan and respond accordingly.

If we look back at the reasons behind big swings in sterling value, we can better understand how it may respond to similar events and knock-on consequences in the future.

Through the Years

For example, the pound was particularly sensitive to political moves like David Cameron stepping down as PM and being replaced by Theresa May. We can see the effects clearly in the movement of GBPUSD.

Sterling rallied to a high of $1.34, as investors craved more stability and normality, only for another big drop when May vowed to push through Brexit quickly and the threat of a ‘No Deal’ became a real possibility.

In 2017, Article 50 of the Treaty on European Union was triggered, formalising the UK’s exit. Markets again responded with cautious optimism that stability may return, with the pound remaining stable.

Another big political event to have an impact was the snap election of 2017. This election, driven by the political discourse surrounding Brexit, was a disaster for May. The uncertainty it caused hit sterling hard, with the pound dropping 2% of its value.

The next stage of Brexit uncertainty came in the form of negotiations between the UK and the EU over what a potential trading relationship may come to look like.

In late 2017 and early 2018, markets reacted positively to a potential agreement; relative stability and GBPUSD rose to $1.40.

The good news for sterling continued as a transition deal was agreed to. However, growing unease around the potential for a No Deal saw yet another Brexit induced crash pull the pound down to just $1.27 in August 2018.

Further volatility followed when Theresa May was replaced by Boris Johnson as Prime Minister. The continual threat of a No Deal or “Hard Brexit”, the Conservatives’ resounding election victory and, finally, an EU-UK Brexit Deal being reached, are events that have seen significant fluctuations in the pound.

Trading on Brexit-induced Forex volatility

Trading around Brexit volatility offers opportunities as well as risks for FX traders.

It is important that you understand the factors impacting market movement before you open a position. As we’ve shown in this blog post, political uncertainty, monetary policy, elections and regulatory change can trigger big swings in FX markets.

If you’re trading sterling, make sure you stay up to date with our latest market news or visit our Trading Education Hub to learn more about managing your risk.

Trading on margin is high risk.