What could a Hard Brexit mean for the markets? Plus how to trade the opportunity

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Brexit talk has come back to the forefront of traders minds in recent weeks as politicians return from their summer recess and the pressure to reach a compromise in the not too distant future ramps up even further. To underline how important this could be for the markets, the Bank of America Merrill Lynch recently noted that getting cable (GBPUSD) right would be the best G10 FX trade for the rest of the year!

There’s still significant debate as to whether or not voting to leave the EU is the right decision and what form Brexit should take – for example, should the UK maintain a close relationship with the EU in what’s been coined a ‘soft’ Brexit, or should it pursue greater sovereignty by cutting all ties in a ‘hard’ Brexit?

You can learn to prepare for either outcome and navigate the volatility of each scenario with XTB’s free guide.

Whatever the outcome, deadlines are fast approaching for the finalisation of agreements between the two parties. After a period of planning, Article 50 was triggered on 29th March 2017, starting the official two-year countdown to Brexit. The UK is expected to officially leave the European Union (EU) on Friday 29th March 2019. Subject to final approval by both sides, a 21-month transition period will then begin. Until then, there a few key dates for traders to watch that could spark volatility in the markets:

  • September 30 – October 3: The last Conservative party conference before Britain is scheduled to leave the EU
  • October 18-19: EU Summit. Will the final agreement on divorce term be finalised? How will the statement on future relations affect GBP & FTSE?
  • November: An emergency summit could be needed to finalise the deal if deadlock in Ireland continues
  • December 13-14: last European Council of 2018 is seen as the final practical date for Article 50 to be signed off by both parties
  • January – February 2019: The House of Commons must approve whatever Brexit deal PM May agrees in Brussels
  • March 29 2019: Brexit day arrives. Will it be a seamless transition or a chaotic scramble for politics and markets alike?

What could a Soft Brexit mean for the markets?
Soft Brexit means the UK agreeing a trade deal with the EU, with a minimum two-year transition deal in place to enable a comfortable adjustment period before the new deal kicks in. This new deal would likely mean the UK maintains close ties with the EU, including  potentially joining the EEA or negotiating a new customs partnership alongside enabling continued trade in financial services, the heartbeat of the UK economy.

This type of Brexit would be seem much more favourably by the markets, with investors preferring a sense of stability and the removal of uncertainty. In this sense, the UK related markets may enjoy a relief rally. But which markets could rally the most? Find out with XTB’s Brexit Trading Guide.

What could a Hard Brexit mean for the markets?

Hard Brexit means leaving the EU without a trade deal in place, forcing the UK to fall back to trade on WTO terms with its international partners. UK exports to the EU would be subject to customs checks and additional taxes. Opponents of Brexit argue that a Hard Brexit would be catastrophic for business.

In this scenario, the expectation is that there could be a sharp drop in the GBP, a jump in inflation and a large hit to UK GDP.  Market volatility may increase dramatically as investors react to the UK losing a free trade deal with its biggest trading partner,  but which markets could move the most and how can you trade them? Find out in XTB’s FREE Guide.

Download XTB’s free Brexit Trading Package

As one of the most comprehensive Brexit trading guides on the market, you can sign up for XTB’s online guide which includes an in-depth ebook, video strategies, top trade ideas and access to an exclusive webinar on Thursday, 11th October at 8pm. Find out more here.

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Multi-award winning Chief Marketing Officer at XTB Ltd and a veteran in retail trading after a decade within the industry.