How To Trade Brexit: What You Really Need To Know

Jarratt Davis

Special Consultant to the FPA
How To Trade Brexit: What You Really Need To Know

We get a lot of emails asking how to trade Brexit. This post will look at this question in more detail and I will share my personal opinion on how to trade it.

The Brexit vote shocked many people around the world because it was so aggressively anti-establishment.

No one believed it would happen, but it did. As traders, we try not to get too emotional about events such as Brexit. We cannot change the outcome and so the next best thing is to at least try and profit from it.

Trading the GBP during and in the immediate aftermath was pretty straight forward. The reason that the price moved so predictably was that the result was such a shock.

It’s very rare that the markets experience such events, but when they happen, they generally offer some fantastic trading opportunities.

Being a successful trader right now is identifying how to trade Brexit and being aware of how to react when opportunities come along.

I’ll be explaining how I’ll be trading the GBP over the coming months and years as the Brexit negotiations rumble on.

How to Trade Brexit During 2017/18
When considering how to trade Brexit, you should be aware of the two distinct factors that will be driving the price of the GBP through 2017. The first one is the policies enacted by the Bank of England.

The second one is the market’s expectation of how the Brexit process will impact the UK economy.

There is no way to predict how the GBP will move because it is dependent on how things play out.

We will most likely see the GBP plummet to new lows against stronger currencies if things start to deteriorate. This deterioration could include things like economic data getting worse. If Britain is somehow ‘cut off’ from any beneficial trade deals with Europe, things will also be bad. You should be mindful of these possibilities when thinking of how to trade Brexit.

Alternatively, the recent weakness in the currency could lead to more competitiveness internationally and a rise in inflation. This would force the BoE to increase rates which, in turn, would suddenly make the UK extremely attractive for investors.

The most profitable way to trade the GBP during these Brexit negotiations is to keep your eye on the news.

My view is that the GBP may have one more bout of weakness as the official negotiations start to take place. After this, I believe that the currency will likely strengthen over time.

One reason for this is that there are many more referendums to come in Europe. There is also a very good chance that Britain will manage to negotiate some excellent trade deals globally.

The UK is one of the world’s leading economies and has been at the forefront of global events for hundreds of years. There is no reason to suggest that this will change because we are outside of the EU.

Pairs to Focus On
It’s best to pick a currency that is fundamentally strong when the GBP is going through a period of weakness.

Any currency that is currently in a rate hiking cycle would be the best bet.

The next stage will be to wait for all of the negativity of the negotiations to wear off. After this, the best currencies to sell against the GBP will be those attached to negative central banks.

Any bank that has a dovish monetary policy cycle (such as cutting rates or implementing QE) would be the obvious choice.

Ultimately, I feel that the market will continue to under-price the GBP until it is absolutely certain that the British economy will remain strong.

After this I believe that there is real scope for the GBP to increase in value.

As I write this post in late 2016 I will try and pick the pair that I feel has the biggest chance of seeing a significant move through 2017 and beyond.

The pair that I would pick right now is EURGBP. I feel that this pair has a very good chance of experiencing a significant sell off.

The reason for this is based on my belief that the GBP will recover on some level as Britain leaves the EU to become a fully independent nation. The second side to this trade is the huge amount of uncertainty due to arrive in Europe.

This uncertainty will come in the form of political elections and referendums that could result in yet another exit from the EU.

Therefore, EURGBP to the downside is the trade I would expect to see the most as the months pass by. I would not be surprised if we saw multi year lows on the pair and a test of the mid 0.60s.

Think you are ready to trade article 50?

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