How has Brexit affected the Forex Markets?


The vote for a Brexit on June 23rd sent the world’s financial markets plunging into chaos. Partly, this was because the result was so unexpected.

By the time that the polls closed, most betting websites and pollsters thought that ‘remain’ would be the clear winner, with the Ladbrokes Exchange placing the likelihood of a ‘remain’ victory at 93 per cent.

However, shortly after 7am, it was clear that this prediction was incorrect, and Britain voted to leave the EU by a margin of around 1.3 million votes.

The Immediate Aftermath

Due to the uncertainty created by the result, the stock markets and forex markets took a plunge immediately after the announcement; as well as when international markets opened. For example, when the London Stock Exchange opened, shares plunged and the pound reached a 31-year low. The FTSE 100 fell by 530 points within minutes of trading opening, and many companies announced pauses to recruitment and building projects.

Unsurprisingly, banks and housebuilding companies were among the worst hit companies on the stock exchange. In the immediate hours following the announcement of the decision, Barclays was the worst hit, with shares down 30 per cent.

Such elevated market volatility created great opportunities for day traders, whose brokers allow short selling. Setting up conditional orders for auto trading software to grasp strong trends even when you don’t have immediate access to your trading platform could help you to benefit from such sharp market moves.

What About Since Then?

Mere hours after the announcement, David Cameron announced his intention to resign as the Leader of the Conservative Party and as the UK’s Prime Minister. This political uncertainty, added to the economic uncertainty, caused the pound to plunge further in the forex markets, before recovering slightly.

As a result, the euro also dropped against the dollar in the forex markets, and there was a global rush of capital into the traditional security of the yen and the Swiss franc.

This week, it was confirmed that Theresa May would become the UK’s new Prime Minister, eliminating many of the UK’s political tensions. As a result of this uncertainty ending, the pound rose by 1.5 per cent to $1.3188, as forex traders began to return to the currency as the levels of risk and uncertainty fell. However, some investors do still hold concerns about the new Prime Minister’s ability to negotiate a deal for Britain to leave the EU.

What Does the Future Hold?

Sadly, as the UK continues to bicker about whether Article 50 should be invoked (and if so, when it should be invoked), this uncertainty looks set to continue in the medium term, with forex investors still hesitant to invest in the pound.

As such, analysts expect months of economic and political turmoil, which will be reflected in the forex markets. This, they say, will dwarf the pressure that was placed on the UK’s economy following “Black Wednesday” when the UK was forced out of the Exchange Rate Mechanism, which preceded the euro.

As such, expect to see hesitancy in the forex markets. Morgan Stanley believe that the value of the pound will continue to fall until a deal is reached. The pound, they expect, will fall to anywhere between $1.25 and $1.30. Coinciding with this, HSBC also cut its quarter end and year-end forecasts for sterling, and they believe that it will fall as low as $1.20 by the close of 2016.

To try and bolster the pound in the medium term, Bank of England Governor Mark Carney has pledged to provide more stimulus to cushion the British economy. A full decision will be decided later this week then the Bank meets.

Resultantly, in the coming weeks and months, it looks like we will see more losses for the pound, with the Bank of England looking to limit these losses. If you’re interested in trading in the forex markets and attempting to make money from this uncertainty, then companies such as Sucden Financial can help tell you more.