The impact of politics on the British pound, or how one should trade amid Brexit events. Near-term outlook for GBPUSD.
Brexit is undoubtedly the event that has made the greatest impact on the pound price over the past four years. This article deals with the GBP surges and drops amid the events related to Brexit (it is an abbreviation for “British exit”), the process of the UK’s withdrawal from the European Union. The person who took an advantage of this situation on time and anticipated the pound movements amid the developing events was Jordan Rochester, an economist known as Mr. Brexit to colleagues and clients, because of his successful work as a political analyst and pound prognosticator during the Brexit era.
Well, let us try to learn on his example how to accurately anticipate the currency price movements when trading the news.
Rochester spends his days scouring every new headline to recalibrate the probabilities of the final outcome. At the same time, he’s checking each change against market moves, looking for dislocations for a tactical trade, and boning up on the intricacies of the British Parliament.
Rochester’s colleagues greatly admire his work. “Jordan’s insight into British politics and his ability to decipher the narratives and political actors has been extremely solid,” the London-based money manager said. “It’s not easy to trade politics. What politicians say and what they ultimately do can produce a series of entirely different market outcomes.”
Let us try to find out what events became crucial for the GBPUSD trend reversal during the long Brexit saga.
I prepared an interesting chart of Brexit events for you. It presents how Mr. Rochester anticipated most movements of the British pound, following those events. Of course, the historical data are now clear from the chart, which proves his forecasts to surprisingly accurate.
On June 23, 2016, the United Kingdom votes to exit the EU, the market price instantly reacts, and the pound loses one-sixth of its value just in a day, reaching the low of 1985.
Theresa May announces early parliamentary elections on April 18, 2017.This news allows the pound to soar and reach the highest value since February 2. Afterwards, there is another piece of news that stops the GBP growth. On June 9, 2017, Conservatives lose the majority in the UK parliament. November 2, the Bank of England raises the interest rate for the first time in 10 years, the pound is about 10% up.
The GBP is growing higher, and there are several drives, including the falling dollar, hopes for a soft Brexit and its next extensions, economic growth in general. In April, weak reports on the UK employment and inflation, as well as the BoE’s unwillingness to hike the interest rate, send the GBP down. October 5, 2018, Michel Barnier, the EU's chief Brexit negotiator announces that the Brexit deal is “very close”. The market interprets it as a bullish factor and the sterling is rising, but the announcement was supporting the GBP growth for just ten days.
March 29, 2019, the UK Parliament rejects Theresa May’s Brexit deal for a third time. Uncertainty is increasing, the pound starts sliding down. On May 24, Theresa May announces she will step aside as the UK PM on June 7, which sends the GBP even lower. On July 24, Boris Johnson becomes the UK’s new Prime Minister. The pound hits level $1.25 on the very first day of Johnson in his new post as there are rising concerns about a no-deal Brexit.
Traders’ reaction
Here is a good illustration how economic events affected the British pound.
It should be borne in mind that when the pound falls, t bets for currency volatility are climbing fast. The British stock exchange is slowly shrinking. Gilts are marching higher as investors seek the safest assets to redistribute the capitals.
Rochester’s latest forecast that came true is the pound price of $1.25. The GBPUSD hit Rochester’s year-end forecast of 1.25 the day after the Conservative Party chose Johnson as its new leader. He says the pound will be trading around this level over the rest of 2019 until U.K. lawmakers negotiate an agreement with the EU or decide to withdraw without one.
Right now, Rochester estimates the chances of the other major outcomes of Brexit, with or without a deal, at about 40% and 30%, respectively.
Amid these events, traders are trying hedge against losses. Philippos Kassimatis, a co-founder at hedging advisory firm Maven Global, says demand for protection against the pound losses has increased among private equity firms that own or are seeking to buy U.K. companies, as well as U.S. investors holding pound-denominated assets.
“These investors are not worried too much if the pound devalues by 5% or 7%,” he said. “They care about protecting against a 20% move.”
Rochester admits that, most of the time, the clients of the consulting firm, where Rochester works, don’t want to discuss Brexit, because of what he calls “Brexhaustion.” The hardships associated with Brexit and the British pound make investors to be “waiting on the sidelines for a green light in either direction.” But their interest revives when there’s an event that affects volatility or something to trade, and when it does, he’s always there.
Rochester’s work will surely continue, as the arrival of Boris Johnson as the prime minister has fueled the concerns that the country could leave the EU without an agreement at the end of October.
When Brexit is finished, Rochester will continue to carry out analysis on the risks of a Jeremy Corbyn government, Scottish independence or the future of the U.K. economy. Until then, he’s got plenty of work to do.
“At one point we are going to have a Eureka moment when we say ‘Ah, that’s what Brexit is,’” said Rochester. “But we don’t know when that’s going to happen.”
The latest and a fairly near-term forecast by Rochester suggests that the pound may feature the worst four-day losing streak since 2016 and fall down to as low as $1.15. Let us see if it will come true.
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Price chart of GBPUSD in real time mode
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