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10 Global Markets To Trade Over Brexit Negotiations

October 01, 2018 16:25

Global Markets - Brexit Negotiations

UK and EU negotiations regarding Britain's exit from the EU have reached an impasse at a critical time. The deadline for the terms of a UK and EU divorce (the so-called 'withdrawal agreement') is 17-18 October at the EU Summit. The date was chosen to allow enough time for the UK and European Parliaments to ratify the deal. With time running out, British pound volatility has spiked higher, making this the go-to market for traders. Meanwhile, the Euro currency has largely been unfazed by Brexit, for now. This becomes apparent in the British pound vs. US dollar (GBPUSD) options market, where the one-month implied volatility jumped to its highest since March. This simply means that there are more price changes occuring in the British pound as buyers and sellers battle it out. However, volatility can be a good thing for the educated and disciplined Forex trader. That's because trading the British pound opens up several different tradeable markets.

10 Global Markets that Are Tradeable over Brexit Negotiations

There are nine British pound currency pairs that traders will be focusing on during this time, as well as one stock market index:

  1. GBPUSD (British Pound vs US dollar)
  2. EURGBP (Euro vs British Pound)
  3. GBPAUD (British Pound vs Australian Dollar)
  4. GBPCHF (British Pound vs Swiss Franc)
  5. GBPCAD (British Pound vs Canadian Dollar)
  6. GBPJPY (British Pound vs Japanese Yen)
  7. GBPNZD (British Pound vs New Zealand Dollar)
  8. GBPPLN (British pound vs Polish Zloty) *Prime Accounts
  9. GBPSGD (British Pound vs Singapore Dollar) *Prime Accounts
  10. FTSE100 (The London Stock Exchange's 100 largest publicly listed companies)

One important thing to remember is that currencies are traded in pairs. Therefore, if you were to buy GBP/USD, you believe that the British pound will strengthen against the US dollar. Conversely, if you were to sell, or short, GBPSGD, you believe the British pound will weaken against the Singapore dollar. Think of it like a seesaw - as one goes up, the other goes down. Having access to multiple markets to trade from can be useful to global traders. One reason being that you can analyse the counter currency (the second currency in a pairing) to identify the weakest one. That way you are pairing a strong currency against a weak currency, which will typically result in a stronger directional move.

Trading the British Pound and the UK/EU Reactions

Analysing recent reactions to different headlines has proven useful to traders who can stay up to date with current news. This is because the trader can see what the market thinks of good or bad news. For example:

  • Positive news and market goes up = we know this is the best possible outcome longer term
  • Negative news and market goes down = we know this is the worst possible outcome longer term
  • Positive news and market goes down = we know that whatever the outcome traders are bearish on the market overall
  • Negative news and market goes up = we know that whatever the outcome traders are bullish on the market overall

The last two are typically where the bigger moves happen, because traders are already thinking longer term, and discounting current news. These are called divergent news plays, and can be quite powerful, although more difficult to trade as they happen quickly and move fast.

What Can We Learn from Recent Reactions in the British Pound?

Bloomberg has summed up it up quite nicely, as the chart below shows:

Bloomberg GBPUSD

Source: Bloomberg - GBPUSD - Data Range: September 10 - September 11 2018

The chart above suggests that the market sees a deal between the UK and EU as being bullish for the British pound. A no-deal scenario seems to be bearish for the British pound. Therefore, traders may start to build a watchlist of markets to trade if the British pound rises or falls on any upcoming headlines, or a deal, no deal scenario. A quick way to determine whether a currency pair is strengthening or weakening is to use moving averages.

This indicator helps to determine the overall trend. Let's have a look at an example:

Trading Moving Averages

Source: Admiral Markets MT4 - Demo Account - GBPJPY - Data range: from 22 March 2018 to 28 September 2018 - performed on 1 October 2018 at 11:21 AM BST

In the chart above we can see that the GBPJPY currency pair has remained below its 55-day moving average for much of 2018. However, on 10 September the price closed above the 55-day moving average. This occurred on the same day as when Michel Barnier commented that a deal could be struck in just a matter of weeks. Trading the bar that closed above the moving average could have resulted in buying above the high of the bar with a stop loss at the low. With an entry at 145.03, and a stop loss at 143.06, the total risk is 197 pips. Trading one standard lot of 100,000 units would have resulted in a loss of approximately USD 1,728. Targeting 149.30, the next swing high on the daily chart would have resulted in a profit of approximately USD 3,745 on 21 September.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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