Brexit Plagues the Pound – But How Long will this Continue?
When it was announced that the UK electorate had voted to leave the EU, the pound (GBP) sunk to a 31-year low amid rising tension and huge swathes of negative sentiment. Although it’s fair to say that the GBP has since rebounded, it has continued to trade within a depreciating range against both the U.S. Dollar (USD) and the Euro (EUR).
In short, the uncertainty created by Brexit continues to plague the GBP, preventing it from fully capitalising on the recent decline of the USD. In fact, these two currencies continue to endure frequent peaks and troughs against one another, as sustained volatility and disappointing U.S. data sets continue to cause issues for traders.
In this post, we’ll consider the true strength of the GBP, while asking whether Brexit will continue to hinder its growth in the longer-term.
Brexit Uncertainty – Should you Hedge Against the GBP?
Whether you buy and sell currencies or partake in cfd trading, you’ll probably have noticed that the financial markets as a whole are gripped by uncertainty at present. It just so happens that Brexit is causing the GBP to fluctuate more violently than most asset classes, with the majority of strategists recommending the widespread sale of pound sterling in the current climate.
Instead of backing the USD against the pound, however, traders should consider the merits of the robust and increasingly consistent Euro. After all, the GBP/EUR is set to languish below 1.11 in the coming months, with the pound unlikely to make any significant gains against the Euro for the foreseeable future.
While hedging against the GBP/EUR may be a viable short-term strategy, what about those looking to profit in the longer-term? Sure, there are some studies which suggest that the decline of the GBP against the Euro will continue indefinitely, but this will depend heavily on the progress of Brexit negotiations and the deterministic nature of the pound. If acrimonious discussions can be avoided and the so-called “Brexit risk premium” fails to materialise, for example, the pound could eye a strong recovery towards the end of 2018.
The Bottom Line
In truth, nobody really knows how Brexit will play out, although the growing levels of animosity and discord between Britain and the EU are making the prospect of the former leaving the union without a deal increasingly likely.
This huge uncertainty is also compromising the efforts of financial market traders, particularly those who want to pursue long-term gains.
There’s an argument that such a strategy is fundamentally flawed in the current climate, and that traders will only prosper by backing the EUR/GBP on a short-term basis.