​How Brexit Negotiations Will Impact the Forex, CFD and Financial Markets

March 23, 2017 14:06

brexit 1.png

Dear Traders,

On Wednesday, 29 March, the British Prime Minister Theresa May will trigger Article 50 which will set in motion the withdrawal of the United Kingdom from the European Union (EU).

This is the first attempt in the 60 year history of the EU of a member state to leave. A historic and unique event is around the corner.

How will the Brexit, Brexit news and the British exit from the European Union (EU) actually impact the Forex, CFD and financial markets in general and traders in specific? This article lays out the pieces of puzzle and possible Brexit impact, so that you are well prepared for the upcoming trading weeks.

It's time for a closer look.

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What will happen once Article 50 is triggered?

The latest Brexit news imply that the Brexit process will start as soon as the United Kingdom (UK) triggers Article 50 of the Treaty of Lisbon, which is an EU agreement signed in 2009 by all EU states that stipulates the procedures around an EU exit. UK brexit news now imply that Article 50 will kick off formal negotiations between UK and the EU about the former leaving the latter.

Why is the UK leaving the EU?

The British are exiting the EU after British voters voiced their opinion in a referendum held during June 2016. The vote saw the pro-Brexit camp take the majority in a narrow win with 51.9% of the vote in favour of Brexit, whereas 48.1% opposed the EU exit.

The current British Prime Minister (PM) Theresa May, who replaced ex-British PM David Cameron after his failed attempt to keep the UK as an EU member, announced in October 2016 that triggering Article 50 will occur by the end March 2017.

What is the timeline?

Once Article 50 has been activated, the two camps will only have two years to negotiate their cooperation and life after Brexit. The negotiations could become extended, but approval from all other 27 member states is required.

Here is a potential detailed timeline of the upcoming events:

  1. By the end of March (March 29): UK triggers Article 50.
  2. April: European Council president Donald Tusk could host an EU summit with 27 leaders, not including the UK, to get a mandate for the European Commission to negotiate with the UK.
  3. After EU 27 summit: European Commission could publish negotiating guidelines based on the above mandate.
  4. April/May 2017: Negotiations are expected to begin.
  5. 23 April and 7 May: French Presidential elections take place.
  6. 24 September: German parliamentary elections take place.
  7. Autumn 2017: The UK government is expected to put forward the Great Repeal bill, which will introduce legislation to leave the EU and put all existing EU laws into British law.
  8. October 2018: Negotiations should be completed, unless the negotiations are extended, but this can only occur if all other 27 EU member states approve.
  9. Between October 2018 and March 2019: The Houses of Parliament, European Council, and the European Parliament vote on the negotiated deal.
  10. March 2019: UK formally withdraws from the European Union (EU).

brexit 2.pngSource: BBC.

Could the UK decide not to leave the EU?

Article 50 has never been triggered so there are no past examples of nation states using the exit clause to leave the EU.

Legally speaking, a trigger of the exit clause does not seem to equal an EU exit on its own right. This means that the UK could, in theory, decide not to exit EU even after Brexit negotiations have started, although the Justice Secretary Liz Truss suggested that the article was irrevocable.

Politically speaking, this could be true. Certainly in the current environment it seems unfeasible to change political course because the will of people, which was voiced in the referendum, would be ignored.

Although it seems highly unlikely at the moment, the only scenario where Brexit could be avoided is if a new general election would take place and a party that campaigned on a promise to keep Britain in the EU won those elections. In this case, the election mandate could trump the (non-binding) referendum mandate and arm it with a new political direction.

What will the negotiations discuss?

The latest bit of news about Brexit is that the negotiations will cover a wide range of topics, from the exit itself to a new potential trade deal that is activated once the UK leaves.

  1. The number one topic for the UK seems to be securing access to the EU market for its businesses, goods, and services but with control over its immigration policy.
  2. The European Union's main viewpoint, however, is that the single market and its freedom of movement of goods, capital, services and people cannot be partly implemented.
  3. The EU seems unwilling to accept a full trade deal where the UK does not commit to the free movement of people.

The talks will also need to address other areas of interest, such as:

  1. The citizens from the UK and the EU who live in the other territories (British leaving in the EU and EU citizens living in the UK).
  2. Funds that the UK has pledged to the EU and the EU to the UK.
  3. Health insurance, cross-border security, cooperation on foreign policy, and many more.

Officially, no list of negotiation points has been released nor discussed. The specific areas will be mentioned once Article 50 is triggered. To prepare for that news event, it could be useful to review our news trading webinar (see video below).

Financial Analysis with Pre Article 50 and Post Article 50 Outlook

Here we will cover the most important aspects of:

  1. Economic impact of Brexit on EU
  2. Economic impact of Brexit on the UK
  3. Economic impact of Brexit on US financial markets and its impact on their most traded currencies.

So what does Brexit mean for Forex and how will Forex market look like after Brexit?

GBP/USD

On Monday, 20 March, it was announced that the UK PM Theresa May will trigger Article 50 on 29 March. As we showed in our Live Session Recap webinar, the GBP was definitely the best performer, making more than 100 pips after the live setup and analysis that was made on Monday. Our opinion is that BOE may not raise interest rates soon, although the BOE switched to a hawkish stance after their latest MPC meeting minutes.

As the UK is almost set to start the process of leaving the EU by the end of March, where Scotland might be holding a second independence referendum, we think that the gains in GBP/USD might be limited.

We should also not exclude the scope of negativity that has already been priced in the market with all the news surrounding Brexit. Similarly to previous Fed rate hike, which was priced in the market, what can happen is a spike on GBP/USD after Article 50 negativity has been shrugged off. Brexit impact on the pound might be twofold.

Good news for Brexit is that GBP/USD Daily chart confirm our view that we might see a reversal on GBP/USD even after Article 50 is announced. On daily time frame, we see a bullish SHS pattern (inverted head and shoulders), with a confluence at monthly L4 camarilla level at 1.2180. Monthly L5 camarilla level with Q (quarterly) L3 makes additional confluence at 1.2015 level. Short-term daily support is Monthly L3 and bullish order block (green highlight) at 1.2350.

Traders should watch for any possible rejection off 1.2350 before Article 50 is officially announced while the spike caused by enacting Article 50 should not tank the pair lower than Q L3 and M L5 confluence at 1.2015. Now-moment buyers might wait there and we don't exclude the GBP/USD going back towards 1.2740 (M H5) and 1.2890 (Q H4). The gains might be limited at Q H4 camarilla level.

USDx (Dollar Index)

The move on the Dollar Index is largely contingent on whether the Fed can meet the market expectations of three rate hikes in this year. If the Fed signals a clear plan to hike rates over 2017 and then be able to deliver on this, the Dollar Index should gradually rise. Any unexpected delays or signals of rate cuts will be negative to the Dollar Index.

The USDx has broken an inner trend line, and it seems it's targeting 98.70 (L5 monthly camarilla and trend line confluence). Bearish SHS pattern (Head and Shoulders) shows a confluence in 102.00-25 zone, so we might see a rejection on volatility spike when Article 50 announcement is official. Now-moment sellers might be waiting in the zone to tank the price again.

EUR/USD

Another important relation between Forex and Brexit is the possible impact on the EUR/USD.

We think that we are near the bottom end of this pair, and so we are range-bound here from 1.0480 (M L3 and trend line confluence) to 1.1050 (Q H4 strong resistance). Of course, the US is on track for 3 hikes this year, so this should minimise any upside in this pair. However, as the ECB may shift to normalising rates also in due time, it could limit downside too and possibly lead to a change in direction on this pair.

Diminishing risks in Europe are providing some support to EUR, but we keep noting the widening spreads between German and French 10-year bonds reaching a high for March, around 67 basis point. French elections are in focus for the EUR currency basket, so Article 50 announcement should have a correlated impact on EUR/USD.

Additionally, daily chart has shaped a bullish W pattern, with momentum candles supporting the EUR/USD upmove as we analysed in our previous technical analysis.

Correlation between EUR/USD and GBP/USD is strong, reading above 70 on last 200 daily candles, so we expect EUR/USD to stay in range after Article 50 has been announced.

Our conclusion is that Brexit has already been priced in and that after a potential initial drop, the GBP may be supported. If you want to trade this volatile release on 29 March, we strongly suggest VPS tool that should safeguard your account.

Cheers and safe trading,

Chris and Nenad

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