GBP trading opportunities arising from the Brexit situationToday, the British Parliament is set to vote on Theresa May’s Brexit deal. Most economists are forecasting that the majority of MPs will vote against it, which will certainly have a negative impact on the pound. On the other hand, approval for the deal would certainly come as a surprise and most likely support the sterling.
But before we have a closer look to what could happen to the GBP after this vote, let’s review how important it is for you to be aware of what’s going on globally to be a more successful Forex trader. So, let’s jump right in.
The importance of macroeconomics in Forex decisions
As a Forex trader, it’s crucial for you to understand why and how events from all around the world can immediately impact exchange rates.
After all, the Forex market is a global marketplace, whose participants come from every corner of the planet. Forex activity is a globalized activity, one that reflects how inter-connected our world is. That’s why macroeconomics and global events play an even greater role now than ever in Forex trading. Because they help determine a country’s economic health, which influences trader perceptions of any given country and ultimately their views on the value of the related currency.
The global events with the highest impact on the Forex market are typically political events, economic releases, as well as war and natural disasters.
The political landscape of a country definitely plays a major role in determining a country’s economic outlook (and consequently how the value of its currency is perceived).
Let’s come back to the Brexit vote that took place in June 2016.
The outcome of this vote was such a surprise – even the bookmakers had predicted that “Remainers” would win – that the British Pound quickly plunged to its lowest level since 1985.
Why? Because the country’s economic outlook was suddenly very uncertain after the UK voted to leave the EU bloc – not to mention the resulting political instability, with David Cameron resigning in the wake of the vote result. Such uncertainty invariably triggers higher volatility within the markets.
Another political event with big ramifications is changes of the ruling political power, especially those with substantially different ideas to the previous party. Fiscal and monetary policies from a new ruling party will be among the most influential decisions in the forex market. A government can, for instance, decide to increase government spending, or on the other hand tighten spending, which will impact the economic outlook – either boosting the value of a currency or weighing down on it. As the central bank is the institution controlling the money supply, its decisions will have a direct impact on a country’s currency.
Another important political event is an unexpected election. Whether they occur following a scandal or are triggered by a leader resigning, the result is generally political turmoil, which impacts the stability of the business sector, thus triggering negative knock-on effects for that country’s currency.
Forex traders do not like uncertainty and instability!
In the fast-paced Forex marketplace, economic reports and releases are important to follow how the economic outlook of a country is evolving.
Currency pair volatility is especially influenced by growth, inflation, employment and business/consumer confidence/spending figures, as well as interest rate decisions from a country’s central bank.
- The GDP is the most comprehensive report to evaluate a country’s economic performance and future outlook, as it measures the output of goods/services produced by a country. If the GDP figures are positive, then traders will be more willing to invest in this country, which will support the currency.
- Inflation is an important indicator, as it signals lower purchasing power, which can negatively impact the value of a currency. On the other hand, higher inflation could lead central banks to increase interest rates to curb inflation levels, which supports concerned currency values.
- Employment and business/consumer confidence and spending figures can also give insightful clues about the current and expected economic health of a country.
While it’s impossible to take into consideration the unexpected when you trade the Forex market, you should always be an informed trader, one that knows about global events and the economic calendar to make more informed trading decisions.
Thus, the potential impact of political instability, international trade relationships, economic figures and reports, strikes, wars and natural disasters should be part of your comprehensive trading analysis and strategy as a primary indicator to gauge the economic strength of a country, and thus its currency.
You should always stay up to date with market news
As you’ve probably grasped by now, to be successful in the Forex market you need to be aware of what’s going on in the world.
Not only that, it will help you to anticipate potential higher volatility that could affect your trading positions – avoiding it when required, but also using it to your advantage.
Indeed, volatility is what offers traders the best opportunities to make money! You just need to learn how to effectively leverage volatility with trading tools that also help you minimize downside risk. You could, for instance, change your leverage level, reduce your position sizes and adjust your targeted prices.
A reliable professional broker usually helps you get better trading results by providing advanced trading and money management tools. FXPRIMUS, for instance, offers an economic calendar, trading signals and daily market alerts to allow its trading community to always be aware of what’s going on the markets. It helps its traders to make actionable trades, with higher probability of success.
Now that you know how exactly political and economic news affect the Forex market, let’s come back to today’s vote.
What happens after today’s vote on Theresa May’s Brexit deal?
The original vote, due on Dec. 11th, was postponed, as PM Theresa May realized that she would very likely face rejection if the vote was held at that time. She decided to get more insurance from the EU regarding the “Irish backstop”, before submitting her Brexit deal to the British MPs.
Now, Parliament is back to vote, but the situation doesn’t seem to have changed much and the clock is ticking as Brexit day is due on March 29th, 2019.
The most likely scenario is that her deal will be rejected, which could hit the pound and the other British assets hard, depending on how many MPs reject the deal:
- If the deal is rejected by a small margin, then the pound might slide a bit, while U.K. stocks might take a bit of a tumble. May should then return to Brussels to renegotiate or get more specifications about certain aspects of the deal, especially regarding the Irish backstop, before coming back to Parliament.
- If the deal is rejected by a large majority, then several scenarios can be expected. In any case, the pound and U.K. stocks are both very likely to plunge. Jeremy Corbyn could very well trigger a vote of no confidence, which could potentially lead to a general election, a Labor government and still no Brexit deal. In this event, the uncertainty about Brexit will be at its highest, which will strongly weigh on British assets. Under such a scenario, momentum for a second referendum may start to gather steam, which could very well be favorable for the GBP if people decide to stay in the EU.
- Finally – though more unlikely – the U.K. could also revoke or delay Article 50, which could support GBP prices, as it would postpone Brexit day leaving the U.K. and the EU more time to negotiate.
As you can see, there are several potential outcomes traders can expect today for the GBP, depending on how things go for the deal, the prime minister and her party, as well as the country.
The two currency pairs that will probably have the highest trading volume today are the GBP/USD and the EUR/GBP. Don’t forget that other financial assets will be impacted by today’s decision, such as the value of the British index – the FTSE 100, and the stocks included in this index.
To take advantage of these potential big market movements on the pound, the FTSE 100 and its individual stocks, you can use different types of financial instruments. Trading around this high-impact event can be done with FXPRIMUS, which offers great trading conditions on the Forex market as well as on CFDs on FTSE 100.
The way currency values evolve greatly depends on economic and political factors that influence the economic outlook of a country. Knowing which factors to monitor while trading will help you get an advantage in the competitive and fast-changing world of Forex.
Today’s vote will obviously have a considerable impact on the pound and other British financial assets, so expect higher volatility on the British market – use wise money and risk management tools and follow the news!