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Anyone whos been trading for the past several years would be fairly familiar with the term Brexit. We all remember the aftermath in June of 2016 as one of the most liquid moves in the GBP trading price.
With so much noise surrounding the event it was hard for most traders/ analysts to figure out the key components of the situation. For example; No one knew at first if this decision would benefit Europe or Britain (or neither). Its become clear that both sides have a substantial amount to lose from this arrangement and that there were a lot of moving parts that are movning the markets.
Here is a brief timeline of the Brexit situation:
1) June 2016 - Referendum (Public Vote) in the U.K about Brexit- The people that wanted to leave won the vote by a small margin, showing the country was divided on the issue.
2) The Vote was said to have been won and accelerated by an aggressive media campaign by the Leave. EU party.
3) The then-prime minister, Theresa May, tried for years to pass a deal through her parliament that would allow them to leave the EU. This was rejected on many occasions. May asks for several extensions for the deal.
4) Brexit situations got more serious and due to a parliament that was uncooperative, PM May stepped down.
5) Boris Johnson replaces Theresa May as the new Prime Minister of U.K.
6) Boris pretended to negotiate with Europe but secretly just waited until the parliament was out of session so that he could take UK out of the EU without having to ask for permission.
7) The October 31, 2019 deadline was hit and there was still no substantive deal in sight, a decision was reached to extend the vote until Jan. 31 2020.
This entire process has been a giant game of trying to win approval in parliament, and then asking the EU council for an extension..
Now I know what you're thinking...what are the possible scenarios? Will they just keep extending the deadline? Who does this hurt more? And how does this play into the markets??
First lets explore possible scenarios:
- Hard Brexit: A hard Brexit means that the UK will leave the EU without a deal. Meaning the EU could impose any sanction or tariff on the UK in order to make up for money they're losing. This would hurt the UK because the EU provides Europe with an open market. If the UK has to pay tariffs to trade with the other EU members then it could significantly reduce the economic output of Britain.
-Soft Brexit: A soft Brexit scenario entails leaving the EU WITH a deal; this would hurt both sides, but mostly Europe. As Europe is seeing a slow down in production, manufacturing, and confidence we can start to see the markets follow. The fact that Europe has issues like a banking crisis where the central bank is charging negative interest rates and the largest member banks are failing, then they will need the stability of the UK. The UK is also one of the largest consumers in Europe and represents 13% of the EU total budget.
The likelihood of passing a deal in parliament is getting increasingly more difficult for Boris Johnson. There will likely be a hard Brexit or a scenario where they extend the deadline yet AGAIN on the 31st of January.
Now lets talks Markets:
Hard Brexit: GBP Weakness, EUR will likely crash.
Soft Brexit: Some major moves before the event but both will cause much volatility since most traders will have read the deal and understood the economic ramifications before adjusting positions.
Extension: GBP weakness, EUR Crash
Its important to note that the exchange rate for GBP may actually increase as more investors see that Europe has more to lose. Even without Brexit, Europe is likely to see some signs of recession going into 2020.
[OPINION ONLY- Speculation]
Short EUR
Sell the GBP rally (When its time)
Buy Gold
- Written by: Pipstradamus [11.7.2019]
Brexit tensions getting stronger as the markets price in the uncertainty
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