There have been a number of events that have shaken the political and economic world in recent years, but one of the most significant is undoubtedly Brexit.
In June 2016, the people of the United Kingdom voted narrowly to leave the European Union, a result that sent shockwaves throughout the world – something that is still a major source of upheaval two years later. Although the date of the UK’s official departure from the EU is fast approaching, Brexit negotiations are still mired in confusion and disagreement, and the implications of all this are likely to be profound and long-term.
For those who make a living by trading currencies, the Brexit vote has posed several challenges. During the last two years, traders of all experience levels have been looking for answers and for those concerned about the personal impact of Brexit on their trading, there are some useful sites out there. They offer advice on everything from how to avoid forex scam artists to trading the Euro and Sterling during the Brexit negotiations.
The immediate post-referendum environment was chaotic. Uncertainty was the prevailing theme, for politicians, economists, and Forex traders. While the UK government has made repeated attempts to bring clarity to the process, they have been undermined, not just by the twists and turns of the Brexit negotiations, but by the political manoeuvres at Westminster, and by the fact that Prime Minister Theresa May is leading a minority government.
But while the uncertainty over what a post-Brexit UK economy might look like are bad news for business, the same doesn’t necessarily apply to Forex traders. In fact, although volatility has prevailed in the markets since the Brexit vote, there is an element of predictability to those fluctuations, which can offer opportunities for traders.
Decline and fall
The underlying trend in the Forex markets since the referendum has been of the devaluation of the pound. But although a devalued currency can leave Forex traders with less room to manoeuvre, it also provides opportunities. One of the advantages of trading currency is that it is a derivative-based and liquid form of trading, which makes it possible to profit even when the market is depreciating, in this case by hedging against the pound.
The declining value of the pound has also been relatively predictable. While the general trend is downwards, this has been marked not by a steady depreciation, but by a series of dramatic falls, followed by smaller recoveries.
Each of these dramatic slumps in the value of the pound usually follows major announcements in the long-running Brexit negotiation process. Every time negotiations hit a setback, the pound falls, then makes a modest recovery until the next piece of bad news. It is therefore possible both to profit from these slumps, as they occur following relatively predictable triggers, and to profit in the long-term, as the pound is locked into a decline that is likely to continue for many months.
The full effects of Brexit will take years to be understood, and once the UK actually leaves the EU, Forex markets may move into a different pattern. But while negotiations continue, there are opportunities for shrewd Forex traders to capitalise on the declining pound.