Hope for the Best, Prepare for the Worst

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Updated: Jan 10, 2019, 13:57 UTC

This idiom could not be more applicable as we look to 2019 after global markets erased their gains for the year after almost 10 consecutive years of a bull run. As complacency spread in 2017 amid high global growth and decreased political risk, 2018 seemed much less benign. But does this herald trouble for 2019?

Read XTB’s Free Report: 7 Disasters of 2019

Calm before the storm as Brexit worries mount?

It’s been a relatively subdued start to the week for the pound, with sterling making small gains against the US dollar and Japanese Yen, but falling back against the Euro. The US dollar itself may be vulnerable going forward, especially if the Fed adopt a slower pace of tightening – or even pause their current hiking cycle – and this would provide a boost to the GBP/USD rate. However, the biggest driver in this market will likely remain the pound and while the rate has moved back above the $1.27 handle, it wouldn’t be too surprising if we experience fairly quiet trade in the coming days in a kind of calm before the storm as traders await next week’s key Brexit vote on PM May’s deal.

The market fell approximately 20% from the day of the referendum to the post-vote low of 1.1992. A 25% drop from the current levels would see price drop below parity to 0.9500. Source: xStation

The GBP/USD has now moved back above the 50 day SMA (yellow line) and in doing so is close to its highest level in a month – and also above where it was before the leadership challenge against PM May in December. Price has spent the majority of the time below the 50 SMA in the past 9 months and the latest push above it is no doubt a pleasing development. Despite the parliamentary arithmetic making the chances of May’s deal passing through the Commons challenging to say the least, the pound does appear fairly well supported at present and should the PM pull off an unexpected victory then there’s plenty of scope for a relief rally with the next swing level not coming in until 1.3175. As for near term support the 1.27 handle is the first place to look but if this breaks then last week’s low of 1.2405 may be in for a retest.

How far could markets fall in the case of a no deal Brexit?

A lack of agreement between the EU and the UK by the end of March could be ugly for markets and businesses alike. While we always knew this scenario would be negative, the projections by the Bank of England in the event of a disorderly Brexit are truly shocking:

GDP could tumble by 8%
Unemployment rate could double to above 7%
A depreciation in the pound by up to 25%

Want more analysis?

To read more about threats to the markets that could materialize over the next 12 months and how you could take advantage of the volatility, you can download XTB’s report: 7 Disasters for 2019 for free. It includes more in-depth analysis on a Hard Brexit scenario, as well as other threats to the economy including Italexit, escalating Trade Wars, Middle Eastern conflict and more.

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