Brexit Three Scenarios and Whats Priced In for GBPUSD

Brexit: Three Scenarios and What’s Priced In for GBP/USD?

Nearly four and half years on from the Brexit vote in June 2016, the finish line is finally in sight for the UK to formally leave the European Union. One way or another, the UK’s “transition period” will officially end on 31 December, though we’ve learned through experience that seemingly “hard and intractable” deadlines can be delayed repeatedly in the interest of expediency when it comes to Brexit.

In any event, negotiations are reportedly 95% done (it’s always that last 5% that’s the most difficult!), with the final sticking points relating to state aid, fair competition, fishing rights, and conflict resolution mechanisms. With the final European Council meeting of the year scheduled for 10-11 December, we’d likely need to see some serious progress by the end of this week to allow EU leaders to translate/review/agree on any arrangement.

From our perspective, we are likely to see one of three scenarios play out by the end of the year, with the associated estimated probabilities:

Comprehensive Deal (~20%) – Time is getting tight, but negotiators on both sides of the English Channel have publicly expressed support for a full, comprehensive trade deal. Given the lack of progress over the previous half-decade, traders are understandably skeptical that the two sides can complete a wide-ranging agreement in the next couple of weeks. That said, readers who are optimistic about the prospects of this scenario coming to pass may want to consider bullish trades on UK assets, with both the pound and FTSE poised to surge if a balanced, comprehensive deal is reached.
“Bare Bones” Deal (~50%)– In this scenario, UK and EU negotiators are able to cobble together a last-minute “skinny” trade deal, potentially with an extension of the transition period to minimize economic disruption. While the two sides would need to pay special attention to certain sectors (such as the UK’s large financial services industry), the market believes there’s still a path to such an agreement. That said, this is seen as the most likely outcome by traders and therefore may lead to less volatility (in other words, it’s relatively “priced in”). That said, the initial reaction to such an agreement would likely be moderately positive for UK assets as it would remove the major risk of the UK spinning out of the UK with no deal.
No Deal (~30%) – If negotiations take a turn for the worse in the coming days, odds of a disruptive no-deal, “hard” Brexit, where the UK reverts to the international trading rules set by the World Trade Organization (WTO), will rise. In 2019, the EU accounted for 43% of UK exports and about 50% of UK imports, so the imposition of new WTO tariffs and stricter border controls could tip the vulnerable UK economy back into recession in 2021.Traders still see this scenario as relatively unlikely, but it would certainly be very disruptive to the UK economy if it comes to pass. In terms of market moves, the pound would likely fall sharply, as would the FTSE (with banks and importers particularly vulnerable) as citizens and firms adapt to a dramatically different economic environment. Down the road, this scenario could also lead to the breakup of the United Kingdom, with support growing for both Scottish independence and a potential reunification of Ireland.

As we approach the end of the year, Brexit negotiations will be the most important factor for GBP and FTSE traders to watch. When it comes to GBP/USD, the pair has rallied nearly 2,000 pips off its pandemic (and post-Brexit-vote low) earlier this year, but a comprehensive deal with the EU could push the pair higher toward 1.3600 if the two sides can reach a comprehensive deal, while a surprise no-deal scenario could take the pair down toward 1.2900:

Source: TradingView, GAIN Capital

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.