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Brexit Vote Fallout: Here’s What It Could Mean for the Pound

After shocking the global community in 2016 with a referendum to leave the European Union, the United Kingdom is nearing its departure date from the EU. Now, more than two years after the initial vote, Prime Minister Theresa May and the EU have come to an agreement for the terms of a such a divorce.

However, back in London, UK Parliament is still yet to vote on the agreement with the scheduled date for Tuesday, December 11th. Parliament’s decision on the deal is sure to affect currency markets as many traders are waiting on the sidelines or turning to derivatives markets to see how the ordeal plays out.

While currency traders await the outcome and hedge their risk for shifts coming in the GBP and EUR markets, there are three possible scenarios to consider. Here’s what they are and what they mean for currency traders and international money transfers looking forward.

Parliament Doesn’t Approve

The first and most likely outcome is for the UK Parliament to not approve the deal. There are already indicators that the Prime Minister’s government is unlikely to win including not only public sentiment, but May’s government being found in contempt of Parliament for refusing to publish legal advice from the attorney general about the agreement.

Parliament not approving the deal is considered to be the most likely outcome; however, there are other scenarios to consider beyond the disapproval itself. With so many considering the likelihood of Parliament rejecting the deal, the question now becomes focused not on if the deal is unapproved, but by how much.

Small Margin Defeat, Later a Small Margin Pass  

If May is able to only lose by a difference of around 50 votes the first time around, then she still stands a chance at making some modest changes to the agreement in Brussels and returning to London for another shot. A small margin of defeat from the MPs means that May’s efforts haven’t gone to waste and that the possibility of passing a reworked agreement still exists.

In this scenario, the GBP is likely to fluctuate as May and her government looks to rework the agreement and get more MPs on board. Those trading and exchanging currencies are likely to see a drop in the pound once the deal is defeated then a subsequent rise after a revised agreement is passed. Expect choppy trading in the meantime.  

Large Defeat

On the other hand, should Parliament vote no to the agreement by a significant margin, closer to 100 votes, then traders can likely expect a more severe decline in the GBP as it stacks up to the USD and especially the EUR? With a large defeat and drop in confidence of Theresa May’s government, those trading and buying the sterling pound should be prepared for a downturn. Moving forward with a no-deal situation, the decrease in GBP is likely to continue for the duration of the uncertainty. Not only will traders in the currency markets see drops, but international money transfers could spike as investors and others look to another currency to store value until more certainty is reached. The longer the uncertainty, the greater the decline.

Parliament Approves the Agreement

Though widely considered to be the least likely of the potential outcomes, one must always consider all angles. In the event that Parliament votes in agreement with the deal the first time around, the markets are going to be looking at a very different story. With so many not expecting Parliament to approve the agreement the first time through, the result is likely to be a strong rally and surge as the uncertainty is removed from the equation and traders take advantage of the good news.

There’s a high likelihood that the initial surge will set the tone for rates leading into the effective Brexit date in March. International traders and money transfers will likely be looking at a significant increase in volume should the GBP climb to the 1.17-1.20 mark against the EUR, and a smaller, but still noticeable jump, with an uptick to 1.15.

Bottom Line

As is so often the case with tumultuous political and economic events, the markets are looking to avoid uncertainty and mitigate risk. Given the current state of Brexit, many are sitting on the sidelines until the vote and potentially even waiting for changes to be made to the initial proposal. Regardless of what the outcome is, one thing is certain: everyone is expecting big shifts coming soon as the British Pound Volatility Index (BPVIX) is maintaining its highest points (14.0-14.1) since the initial referendum in 2016.

 

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Sheza Gary

Sheza Gary

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