UK finally leaves the EU! What happens next?

February 03, 2020 17:32

In 1973, the UK joined the European Economic Community which is now known as the European Union. On 31 January 2020, some 47-years later, the UK stopped being a member of the EU, making it the first member state to leave.

The question on everyone's mind is what's next for the UK and its markets? Let's take a look at the situation in more detail.

Brexit: How did we get here?

On the 23 June 2016, the Conservative Party held a public vote on whether or not the UK should leave the EU. Dubbed the Brexit referendum, the Leave vote won by a close margin of 51.9% to 48.1%.

However, actually leaving the EU proved to be difficult to implement for the government. After three years of EU-UK negotiations, two general elections and two Prime Ministers the UK Withdrawal Agreement was finally passed through Parliament in December 2019.

What is the Withdrawal Agreement?

The Withdrawal Agreement lays out some of the terms of the UK's departure from the EU. Some of the main points include:

  • How the UK will pay the £39 billion divorce bill
  • Reinstating EU laws for the transition period
  • A plan to ensure friction-less trade between Ireland (an EU member) and Northern Ireland (now a non-EU member)
  • A law which states that extending the 11-month transition period is prohibited.

Once the Withdrawal Agreement was in place, the EU gave the green light for the UK to officially leave the EU on 31 January 2020 and enter the transition period.

What is the transition period?

The transition period, otherwise known as the implementation period lasts until 31 December 2020. During this period the UK will remain in both the EU customs union and the single market, meaning freedom of movement is still allowed. The transition period is necessary to allow time for new UK-EU negotiations to take place to determine what the future relationship will look like.

Perhaps the most important aspect for the UK markets is the ability for the UK government to secure a UK-EU free trade deal. If this can be done it means the UK can continue to trade with the EU with no tariffs or quotas. It's a big deal as in 2018, 49% of the £1.3 trillion worth of UK trade was with the EU.

If the UK cannot agree a deal then they are likely to leave the EU with no-deal and revert back to World Trade Organisation (WTO) rules which means tariffs and quotas will have to put in place. While negotiations have yet to start the EU has already stated that 11 months is not enough as trade deals usually take around 7 years. However, in the Withdrawal Agreement it is law that the transition period cannot be extended.

What happens now?

Expect markets to react to headlines coming from UK Prime Minister Boris Johnson and the EU's Chief Brexit negotiator Michel Barnier. Negotiations are due to start towards the end of February but both sides have already been laying out their red lines.

In a speech on Monday 3 February, Boris Johnson vowed the Britain will not accept any EU rules on social protections and the environment. Shortly after Michel Barnier said they are prepared to make an 'exceptional offer' for a wide-ranging free trade agreement on the condition the UK retain EU standards and rules, in what is also called a 'level playing field'.

How has the British pound reacted?

On the first trading day after Brexit day, the British pound was the worst performing currency, down against all other majors. It seems the prospect of a no-deal Brexit will weigh on the British pound over the next few months.

However, overall the British pound has struggled for any long term direction since December 2019. This means waiting for the right technical analysis confirmation is essential. For example, the GBP.USD is showing some interesting technical patterns, as we discuss in the next section.

How to trade GBP.USD

The long-term price chart of the British pound against the US dollar (GBP.USD), shows just how volatile the currency pair can be with a slight tendency to move to the downside.

Source: Admiral Markets MetaTrader 5, GBPUSD, Monthly - Data range: from 1 June 1993 to 3 February 2020, accessed on 3 February 2020 at 11:58 am GMT. Please note: Past performance is not a reliable indicator of future results.

While the chart above allows for long-term analysis, trading the market over the next 11 months during the transition period may be more suited for short-term trading. This is due to the fact traders will be preparing for a high level of uncertainty, that is at least until there is more clarity on what the future trading relationship between the UK and EU will look like.

Source: Admiral Markets MetaTrader 5, GBPUSD, Daily - Data range: from 19 June 2019 to 3 February 2020, accessed on 3 February 2020 at 12:58 pm GMT. Please note: Past performance is not a reliable indicator of future results.

The above daily chart of GBP.USD shows the currency pair is struggling for direction as it trades in between key support and resistance lines shown by the black lines on the chart. Buyers have tried to push price beyond the top line and failed. Sellers have tried to push the price below the lower line and failed. Eventually, one side will take control.

In the meantime, traders may look to trade short-term turning points while price remains in the consolidation type of chart pattern. One thing is for certain - this currency pair will not stay quiet for long. How will you be trading it?

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