Brexit and financial markets 

Just over a month ago now all anyone involved in finance could talk about was Brexit and the impact that it could have on the markets.

Now more than a month after the UK voted to leave the EU, all anyone involved in finance can still talk about is Brexit and the impact it could have on the markets.

Where things stand

The above scenario pretty much sums up everything there is to know about the post-Brexit market: It is uncertain. Right after the vote to leave the market was extremely volatile and the pound plummeted to its worst-ever low in the last 30 years. However since then it has recovered (somewhat) though it is not nearly at its pre-Brexit levels.

In that same time the Euro has strengthened against the pound, though that is largely due to the latter’s fall from grace. When compared against the US dollar the Euro has depreciated in value, and so it too is definitely feeling the pressure that Brexit is placing on the market.

Considering there is so much uncertainty in the market it should come as no surprise that the safe haven currencies such as the Japanese Yen and Swiss Franc are doing very well. Recently the Yen did show some volatility as traders felt that the Bank of Japan would intervene, but that did not materialise and it is now stronger than ever.

Market ‘not disorderly’ and no need to intervene

Recently the IMF chief economist noted ahead of the G20 meeting that the forex market is ‘not disorderly’ and that there was no reason for the G20 to agree to tame it. In his view the flexible exchange rates have acted to buffer the shock of events such as the Brexit vote.

The reason for his comments seems to stem from suggestions that the G20 might come to a deal such as they did when they signed the Plaza Accord in 1985. It is worth noting however that as much as a coalition to stabilise the foreign exchange market may sound appealing due to its volatility, the Plaza Accord is thought to have at least partly contributed to Japan’s eventual recession.

While an inter-government intervention to the scale of the Plaza Accord may very well be unlikely, an intervention by central banks (specifically the Bank of Japan) might not be completely out of the question. Still there are other options on the table as well – such as fiscal stimulus and economic reforms that could help alleviate some of Japan’s economic issues.

Also while the IMF might not favour intervention, it has slashed its forecasts for the coming year on the heels of Brexit and the current uncertainty in the market.

What will happen in the coming months

The big event that looms on the horizon is the point where the UK actually begins negotiations with the European Union over its exit. Until that happens the current tepid uncertainty is likely to continue.

However once negotiations begin the market is likely to become even more volatile as many predict that the pound will once again begin to drop sharply. Whether the Euro is able to steady itself through these negotiations is uncertain, but suffice to say every development on that front is bound to have an impact on both currencies.

As far as the rest of the market goes, the continued uncertainty surrounding the Euro and pound will likely keep the safe-haven currencies going strong. Considering the Bank of Japan is already seemingly toying with the idea of stemming the excessive strength of the Yen, it might very well intervene should that happen.

Risky situation overall

While the safe money is staying out of the Brexit situation and gravitating towards safe havens, there could be potential for very rewarding (albeit very risky) plays. The lack of any clear indication as to the direction in which negotiations will take amplifies the risk even further, making it close to impossible to predict how the market will react.

One theory is that while the pound will initially drop sharply as it did post-Brexit, it will bounce back once again. The big question for any trader is whether or not it will continue to stay at close to its current value over the long term or whether it is going to fluctuate on a downward trend.

If you’re thinking about whether or not to trade on forex at very least you should now know the risks. One alternative is to use a platform such as ETX Capital that will offer you the ability to trade not only on the forex market but also other financial markets and instruments too. Considering the magnitude of the fluctuations in the pound right after the Brexit vote, it could be disastrous should you take the wrong position – so tread carefully.

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.

Related Topics

Early Stage Funding