How Do You Trade the Brexit Uncertainty?

Nicholas Kitonyi  |

The UK economy has been in a gradual recovery for the last 12 months, prompting the Bank of England to raise interest rates on two occasions. In November 2017, the Bank of England Governor announced the hiking of the base interest rate for the first time in 10 years, from 0.25% to 0.5%, sending the Pound Sterling tumbling against foreign currencies.

Despite economic growth appearing to have steadied, a second hike was announced in August this year. At the beginning of the month, the Bank of England voted unanimously to hold the base interest rate at 0.75% but Governor Mark Carney maintained that another interest rate hike is almost inevitable regardless of what happens with Brexit negotiations between the UK and EU.

On the other hand, UK Secretary for Brexit negotiations, Dominic Raab, has indicated that there is a possibility of striking a Brexit deal with the EU after all, and he expressed optimism ahead of the November 21 meeting in Brussels. This has further increased the level of uncertainty in the UK market with some investors unmoved by Raab’s comments, while others are feeling more optimistic.

What happens if there’s a no-deal Brexit decision

Despite Secretary Raab’s recent comments, there are those who believe that the most likely outcome of Brexit negotiations is a no-deal Brexit decision, or what has recently been referred to as a “hard Brexit”. If this happens, UK investors will want to take precautionary measures in a bid to cut their risk exposure.

Already, it’s been reported that some manufacturers began proceeding with job cuts last month, while consumer spending on high-cost products has decreased, pushing the UK manufacturing PMI to the lowest level since 2016.

Image Source: TradingView.com

Nonetheless, market sentiment appears to have levelled out following Raab’s comments with the FTSE 100 Index (UKX) remaining steady, although the three-week trend appears relatively bullish, based on the UKX 30-minute chart.

Still, the Pound Sterling continues to struggle against foreign currencies, with the US Dollar in particular pulling strongly ahead following the recent FOMC statement and another impressive non-farm-payrolls number.

As we head towards the second half of the month, investors have begun to anticipate the potential impact of the upcoming US holidays, including Black Friday (November 23) and Cyber Monday (November 26), which traditionally kick off festive season shopping.

Depending on consumer spending during this period, and the demand for the US Dollar, the Pound Sterling could experience even more pressure from the greenback, leading to a downward movement in the GBP/USD pairing - which manages to rally at the start of the month.

Image Source: TradingView.com

Clearly, the level of volatility in the UK market and performance of the Pound Sterling against foreign currencies illustrates what a ‘hard Brexit’ really means - a state of affairs that could become even more complicated if the current proposal to hold another Brexit vote were to be successful in the event of a hard Brexit outcome.

What happens if a deal is agreed

Brexit Secretary Raab’s comments appear to have painted a brighter picture of the separation process. If the EU and UK come to a feasible agreement the UK will be able to trade with the 27 EU member countries on favorable terms rather than having to adhere to stricter World Trade Organization (WHO) terms.

This certainly will guarantee another UK rate hike with optimism likely to return to the stock market and the Pound Sterling. On the other hand, the UK market could assume another bullish run, which could push it towards new multi-month highs, well above the sort of highs reached in October on the FTSE 100 Index chart. As for the GBP/USD pairing, traders could begin to target monthly highs of 1.3300, last witnessed three months ago.

Conclusion

In summary, the UK economy has generally been on the recovery trail. However, the stock market and the Pound Sterling have been affected by the continuous stalemate in the Brexit decision-making process. However, following Brexit Secretary Raab’s comments, things are beginning to look up again which matches the general optimism in the economy. The situation presents some interesting trading opportunities, as illustrated on the FTSE 100 Index and the GBP/USD currency pair as markets enter the final stages of 2018.

DISCLOSURE: I have no position in the securities mentioned in this article and no plans to initiate any positions within the next 72 hours.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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