Brexit talk has come back to the forefront of traders’ minds in recent weeks as UK politicians return from their summer recess and the pressure to reach an agreement with the EU for a new trade deal ramps up even further. To underline how important this could be for the markets, one major global investment bank – 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.

Brexit talk to drive the pound in the near-term

Example: Market reaction to soft Brexit rhetoric:

In late August 2018 the GBPUSD rallied around 180 pips in less than 24 hours following comments from Chief EU Brexit negotiator Barnier in which he stated the the EU wants to make a Brexit deal. (Source: xStation)

GBPUSD spiked higher by 150 pips in less than 20 minutes after reports that Germany would be willing to drop key Brexit demands saw the pound surge higher. (Source: xStation) (5th September)

Example: Market reaction to hard Brexit rhetoric:

Just a couple of days later Barnier said that he “strongly opposed” UK PM May’s proposals on future trade while advising European carmakers that they will have to use fewer British-made parts after Brexit. These comments were made over the weekend when the markets were closed but caused a 50 pip gap lower on the open before price fell a further 90 pips in the next 36 hours. (Source: xStation)

These two examples are intended to show that not just the ultimate agreement reached between the UK and EU will drive markets and that expectations ahead of this will also have an impact. From a trading perspective this means that there will be several opportunities to trade off Brexit-related news before a deal is even reached. For instance if we look back to June 2016, there was a clear move higher ahead of the referendum as the markets began to discount a victory for remain. The thrust and counter-thrust of the upcoming negotiations will also likely drive the pound and cause several moves in the coming months.

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