Before the referendum on June 23rd, the financial markets were poised for turbulence and instability, however following the announcement of Britain's unprecedented decision to leave the EU, the effect on the Sterling currency was dramatic in the extreme. Sinking to its lowest level for three decades, the pound dropped by 12% in just six hours once the result of the vote became public knowledge, and the expectations of the markets took a major blow.
In the last few hours before the votes were counted, the pound saw increased buoyancy as markets around the world seemed to believe that the Remain camp would be victorious, however these hopes were dashed once the realisation that the majority of people had voted to leave the union and risk aversion became widespread across world capital markets. Traders who took their chances in trading on the opinion of the exit polls found themselves experiencing losses as the Pound lost ground overnight against the major currencies of the US Dollar and the Euro.
What Implications Might Brexit Have on Future Trades
At the present time, the UK economy is still reeling from this somewhat unexpected decision. The markets have entered a period of extreme volatility and they are likely to remain in a state of fluctuation for some time yet as political machinations rumble on.
It is important to remember that, although the majority have voted to leave the EU, in fact there will be no major moves in the imminent future. The government have stated that they do not intend to invoke Article 50 any time soon and the entire negotiation process can take at least two years to come to fruition, so it is likely that the markets will not be settling down for some time. Until some decisions have been reached over trade arrangements and the UK's financial future, the pound is unlikely to return to its full strength, however it is possible that, as time goes on, the sterling currency will undergo a period of partial recovery.
To add further instability into the mix, it is also worth remembering that the result of the Referendum is not actually a legally binding decision, and there have already been petitions presented to parliament to set aside the vote. Scotland have also threatened to do anything in their power to block Brexit from taking place and have even put the idea of a second independence vote on the table. All of this is sure to fuel the volatility in the foreign exchange market as countries around the world speculate about whether the pound is a good investment.
Global Ramifications in the FX Market From Brexit
The ramifications of the Brexit vote were not restricted to the UK but were felt all around the world, with almost an immediate impact on capital markets. Not only did the pound fall to an epic low but the Euro too made an aggressive move to the downside, losing more than 500 pips from the same day's highs. As risk aversion ran high, the US Dollar became stronger against all currencies except the Yen and the Swiss Franc saw increased safe haven flows. Despite all this, the Bank of England have promised an extra £250 billion for the financial system in the aim of offsetting risk aversion while the European Central Bank have also agreed to add liquidity into the markets if necessary, yet the prospect of this Central Bank activity is certain to increase volatility in capital markets across the board.
How Has Brexit Affected Forex Brokers?
Interestingly, however, Brexit seems to have had a positive effect on many global forex brokers, with some of the industry's major players reported triple their average trading volume on the day after the vote and a huge surge in account sign ups. Some brokers reported record numbers of orders on their trading platforms and record trading gains for their clients. As trading volumes and price action have settled back to normal, some brokers have begun to ease their margin requirements back to those in place before Brexit with leverage restrictions being returned to normal, although in some cases, position limits on EUR and GBP indices are being maintained for the present. Spreads on GBP pairs are still higher than average and may remain so for some time, with warnings that further volatility may cause restrictions to be put back in place. For the foreseeable future however, there is likely to be an impact on forex brokers, especially those that are regulated in the EU or the UK, from any Brexit related developments.