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How Will Brexit Affect Forex Trading in the UK?

It's fair to say there is some trepidation over Chancellor Philip Hammond's latest budget...
Zak Goldberg is a Law & Business Graduate from the University of Leeds who has chosen to follow his aspirations of becoming a full-time published writer, offering his expertise on all areas of law, finance and business.
Zak Goldberg is a Law & Business Graduate from the University of Leeds who has chosen to follow his aspirations of becoming a full-time published writer, offering his expertise on all areas of law, finance and business.

On Wednesday, Chancellor Philip Hammond will unveil his latest budget, and it’s fair to say that there’s an element of trepidation surrounding its content. Much of this has to do with the looming specter of Brexit, which continues to home into view in line with Prime Minister Theresa May’s March deadline.

More specifically, there remains concern that the Chancellor will use the latest budget to build revenues that offer a safety net once a Brexit deal has been agreed upon, with tax increases expected across the board. The cultivation of this fund would come at the expense of an increased spend on the NHS, however, which provides a major contradiction to one of the fundamental aspects of the leave campaign.

Much more than this, it also transfers some of the financial burden associated with Brexit to households throughout the UK, causing potential issues to everyone from consumers and business-owners to financial market traders.

The Issue Facing Forex Traders in the UK

The issue facing financial market and forex traders is even more pressing, as while Theresa May has pledged to protect the British economy as much as possible in the wake of Brexit, no such assurances have been made to investors. While it may be argued that a robust economy has a largely positive impact on the outlook for financial market traders, a volatile entity such as the foreign exchange remains vulnerable to political shifts and the continued devaluation of the pound.

This is the central issue for traders, and one that no amount of economic reform and safeguarding can negate. The extradition of the UK from the EU will instantly weaken the value of the pound, particularly until the government has secured its economic future through the development of independent, and more importantly lucrative, trade deals outside of Europe. A devalued pound can only ever trade within a restricted range, which at present sees it losing ground to the Euro (EUR) and the US Dollar (USD).

We have already seen this trend take hold, with the pound instantly falling to its lowest rate in 31 years once the result of June’s referendum was announced. While it subsequently rebounded through the summer, it sunk to a new low in October when the Prime Minister first announced her intention to pursue a so-called ‘hard’ Brexit and sever all ties with the single market. Here see that periods of consolidation are followed by sudden, startling declines, with the latter usually triggered by announcements concerning the decision to trigger Article 50 for real.

How Will Brexit Impact on Forex Traders in the UK?

This is why the pound continues to trade in a restricted range, particularly against the EUR and the USD. It is also unlikely that this will stop any time soon, with the decision to officially trigger Article 50 and subsequent negotiations with the remaining EU members likely to create more uncertainty and restrict this trading range even further.

At first glance, Brexit is a phenomenon that is restrictive for Forex traders in the UK, many of whom will look to take their money out of the pound and instead back an alternative currency such as the USD or the EUR (this is also a trend that is prominent across other financial markets and British-based entities become increasingly unappealing to investors).

Of course, this does not necessarily mean that traders will be unable to profit in the Forex market. After all, the liquid and derivative-based nature of currency means that investors can make money even in a depreciating marketplace, specifically by hedging against the pound and speculating that it will under-perform against the EUR and the USD. This does represent a significant restriction, however, while the increasingly volatile nature of the global economy also means that it can only be relied upon as a short-term strategy.

After all, Europe has two seminal elections scheduled for 2017, with Dutch, French and German voters preparing to take to the polls and elect new governments over the course of the next 12 months. With populist parties performing strongly in both polls during the build-up to the election, however, the EUR is being besieged by uncertainty and may well see a significant decline if the trend established by Brexit and Donald Trump’s election grips the continent.

Similarly, the USD may also decline in the months ahead, despite the American economy have continued to showcase growth since the turn of the year. This potential trough relates directly to the economic policies proposed by Donald Trump, as while the President has so far presented vague and generic plans he is known to favor a slightly weakened dollar and more competitively priced exports.

When combined with the issues facing the pound, the devaluation of the EUR and the USD may well create a longer-term problem in the Forex market, as it restricts traders’ options and makes it harder to open profitable positions. This could well deter UK-based traders from investing in currency at all, which in turn will see market activity decline and the prevailing level of economic sentiment fall as a result.

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