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How the Brexit affected Forex trading

Author: Martin Moni
Martin Moni
All publications of the author

 

 

The 23rd of June 2016 was a date marked by all traders as soon as then Prime Minister David Cameron announced the day of the referendum; a big event in the Forex calendar. The United Kingdom, which is comprised of England, Wales, Scotland and Northern Ireland, was going to decide on whether they were going to remain part of the European Union or back out of a decades-long relationship.

Prime Minister David Cameron spearheaded the move for a stay in the EU, while on the other hand Nigel Farage and Boris Johnson were the face of the ‘Leave’ camp. The stance that Nigel Farage took was unexpected, given his history as a commodities trader and whose father is a stockbroker. He should have known how leaving the EU would impact the economy of the UK.

 

 

The main argument around whether or not to leave the EU was around the recent refugee migration from Syria into Europe. The conservatives saw this massive inflow of refugees as a threat, but they could not do anything to put a stop to it, since such decisions had to be made by the entire EU. The conservatives argued that the UK was suffering because it was tied down by other European nations, and needed to stand alone.

In the end, the referendum took place, and the ‘Leave’ camp enjoyed a marginal victory of 51.9% compared to 48.1% for ‘Remain’. The small difference was a testament to just how divided the UK was about this important decision.

The role of the UK in the EU

The Brexit was opposed vehemently by those who supported the ‘Remain’ camp because they stated that the UK depended a lot on other European countries. Despite the fact that the UK is the 5th largest economy in the world with a GDP of above $2.85 trillion, a lot of this GDP depends on their relationship with other European countries. A good measure for this would be to look at the UK’s current account index deficit, which currently stands at -32.7 billion pounds ($43.6 billion). The current account index is a measure of the value of exported versus imported goods, plus other services.

This means that the UK isn’t as financially sound as it would like to be, but that doesn’t mean other EU countries would benefit from the Brexit. The value of the Euro still depends on the financial stability of the entire Eurozone, and a Brexit would cause havoc to the Euro as well. In short, the creation of the EU was mutually beneficial, and everyone plays a role in the development of the member nations.

How trading patterns were affected before the referendum

Forex trading is all about speculation, and making ‘informed guesses’ based on percieved market sentiment. To be able to make such guesses, you need a reliable source of information, and the pre-referendum polls were crucial to Forex brokers. Take the NatCen Social Research poll that took place between the 16th of May and the 12th of June 2016. The polling was done online and over telephone and surveyed over 1,600 random people in the UK.

The results were published on the 21st of June 2016, just 2 days before the referendum and showed that the ‘Remain’ camp would get 53% of the votes and 47% would go to the ‘Leave’ camp. These polls were backed by another poll by the Daily Telegraph which showed similar results. The results by NatCen were also taken very seriously because there were very few undecided people, and the results seemed trustworthy.

A few weeks before that, on the 15th of June, 2016, polls by YouGov had shown increasing support for the Brexit, with the ‘Leave’ campaign having a 7-point lead over the ‘Remain’ camp. The markets reacted to this news negatively, and the British Pound took a slight dive, at least for a day. The 16th of June 2016 is when the murder of Labour MP Jo Cox was shot, a staunch ‘Remain’ supporter. This traumatic event must have galvanized the UK because a polls released on the 19th of June showed support had swung to the ‘Remain’ camp.

Despite a poll by YouGov that had different results, this was all the proof traders needed, and what happened? The sterling pound shot up in value because traders grew more confident in the strength of the pound. So did British stocks and indices, which also experienced a major boost. The sterling pound alone rose to one of its highest levels, gaining plenty of pips for anyone buying the currency.

After the vote

This trend continued all the way through the polling and initial vote-counting, before taking a turn, a major turn. It was a tight race, all the way to the end, but once the final votes were tallied, the pound took a dive. Leading up to the referendum, the GBP/USD pair was trending close to 1.5, but it slumped down to just over 1.33, which is more than a 10% drop, all within a few hours. It was the same story with the Euro, too, which also dropped in value against the US dollar.

 

 

George Soros is a famous investor, and he had predicted that a vote to leave the EU would cause a slump of up to 20%. The results weren’t as dire, but the drop in value for the pound and Euro was still very significant. Some of the best banks offering Forex trading, too, such as Barclays Bank, experienced a major drop in share price of about 30%, and they were some of the worst affected.

What this meant for FX traders

In every field, there are different breeds of people, and in FX trading you are either a cautious trader or risk taker like a scalper. The former chose not to make any trades, which is actually advisable because the markets can be so volatile in the face of critical news. Then there are the risk takers, who knew that they could make money either way; in the end, it was a great trading period for fundamental analysts.

The polls released on the 21st of June 2016 were the first opportunity, and the risk takers placed their faith in the pound. Such a trader would have gained over 2,000 pips if they had bought, say, the GBP/USD pair in 2 days. Later on, after the results of the referendum, the opposite, selling the GBP/USD pair would have gained them over 15,000 pips in a matter of hours. All this would have happened as the cautious trader watched from their forex trading platforms, too afraid to take a risk.

3 months on

It has now been almost 3 months since the historic Brexit vote, and the gravity of the decision is still being felt to this day. Granted, the UK won’t be ‘officially’ out of the EU for a few more months, but a lot has changed. For one, David Cameron resigned soon after the results were announced, and Theresa May is the new Prime Minister.

Part of the benefits of being in the EU was the freedom to move within the European countries and work freely without too much of a hassle. Now, workers from outside the UK will be required to acquire work permits, something which is yet to be guaranteed. Imagine if the chief analyst of your top rated Forex broker was a German, and they weren’t granted a work permit. Don’t forget that the same is also true for UK citizens working in other European countries.

It is this kind of push and pull that is going to dominate the political scene as every country tries to provide the best treatment for their citizens, and someone might get hurt along the way. Comments such as those by Slovakia’s Prime Minister Robert Fico to make the Brexit ‘hurt’ the UK is only a peek at the tension going on between the EU and UK, and that can present opportunities for traders.

London, being the financial capital of the EU, attracted many companies offering financial services set up shop in the UK from elsewhere in the EU countries. As a rule, they all had to be FCA regulated Forex brokers, which was great for clients because the FCA is a reputable and trusted regulator. If the conditions for these same companies became too strict, then they might have to relocate, and that would mean changing to other Forex regulators. Not to sound condescending, but some European countries’ financial regulators aren’t as good, which would spell trouble for FX traders choosing a Forex broker.

Possible future referendums

Even though the UK voted to leave the EU, it’s still not a single country. The votes from Scotland showed that they had chosen to remain in the EU, but were instead dragged away by other UK nations. The First Minister of Scotland wasn’t happy about this, and immediately began talking of a possible referendum for separation from the UK. If this happens, there is bound to be some more depreciation of the sterling pound, and traders are waiting to see if it happens in 2017.

The Euro, too, might be in for some more action. There is speculation that the Brexit and talks of separation from the UK by Scotland may spark a domino effect, leading the entire Eurozone to fall apart and every country to go their own way. Of course, this is still way down the line, but with finances, you can never be sure about anything. Since every speculation and poll can cause the markets to shift, it is paramount keep an eye, and ear, on any news.

 

Below is a short video about how news stations reviewed the effects of the Brexit vote:

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Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.
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